m^ 


Digitized  by  the  Internet  Archiv( 

in  2007  with  funding  from 
I      IViicrosoft  Corooration 


ECONOMICS 


,2^^ 


ECONOMICS. 


BT 


FEAFK  W.  BLACKMAE,  Ph.  D., 

Professor  of  Sociology  and  Economics  in  the  University  of  Kansas. 


Nefaj  fork 
THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  Ltd. 
1912 

All  rights  reserved 


COPTEIGHT,   1900, 

By  crane  &  CO. 

Copyright,  1907, 
By  the  MACMILLAN  COMPANY. 


First  printed  elsewhere.    New  edition  January,  1907; 
March,  1912. 


Berwick  &  Smith  Co.,  Norwood,  Mass.,  U.S.A. 


CONTENTS. 

BOOK  I. 

Nature  and  Scope  of  Political  Economy. 

Chapter  I — Nature  and  Development  of  Economic  Life. — Na- 
ture of  economic  life. — Unconscious  cooperation  of  society. 
— Simplicity  of  early  economic  life. — Hunting  and  fishing. 
— Domestication  of  animals. — Agriculture. — Manufactures. 
— Trade. — Commerce. — Economic  organizations. — Industrial 
stage. — Industrial  revolution. — Free  competition. —  Compe- 
tition in  groups. — Organization  of  capital. — Labor  organiza- 
tions.— Tiie  state  and  industry 17 

Chapter  II — The  Nature  and  Definition  of  Political  Economy, 
— Political  economy  treats  of  economic  life. — Political  econ- 
omy arises  from  concrete  economic  life. — Principles  arising 
from  man's  economic  activity. — Relation  of  man  to  wealth- 
getting  and  wealth-using. — Wide  range  of  economics. — Tech- 
nology of  wealth-getting. — Creation  of  utilities. — Principles 
and  laws  of  political  economy. — Political  economy  is  a  sci- 
ence.— Definition  of  political  economy. — Positions  assumed 
by  Adam  Smith  and  his  followers. — Trend  of  modern  eco- 
nomics.— Economic  fact  and  theory 33 

Chapter  III — The  Scope  and  Methods  of  Political  Economy. — 
Field  of  political  economy. — Boundary  of  the  science  is  sub- 
jective.— Narrow  conception  of  the  science. — Liberal  concep- 
tion.—  Outline  of  economics. — The  pure  science. —  Concrete 
economics. — Practical  economics. — Problem  of  political  econ- 
omy.— Mistakes  in  terminology. — Ethics  and  economics. — 
Politics  and  economics. — Private  and  public  economics. —  So- 
ciology and  economics. — Effect  of  social  organization. —  Ob- 
jects sought  in  political  economy. — Methods  of  study. — Ref- 
erences      42 

(3) 


287971 


4  CONTENTS. 

BOOK  \L 

Production,  Distribution,  and  Consumption. 
PART  I. 

FACTORS  AND   PROCESSES   OF   PRODUCTION. 

Chapter  I — The  Nature  of  Production. — Unity  of  the  economic 
process. — Character  of  production. — Creation  of  wealth. 
— "Who  are  producers. — Nature  of  wealth. — Various  methods 
of  creating  wealth. — Different  ways  of  creating  value. — Va- 
rious factors  of  production. — Relative  conditions 61 

Chapter  II — Land  as  a  Factor  in  Production, — Land  or  nature 
the  first  consideration. — Bounties  of  nature. — Offices  of  land. 
— Civilization  and  the  land  question. — Population  and  land. 
— Law  of  income  from  agriculture. — Limited  returns. — Ex- 
tension of  territory. — Land  area. — Transportation  and  agri- 
culture.— Policy  of  the  United  States. — Monopoly  in  land. — 
Agricultural  area  in  the  United  States. — Variety  of  agricul- 
tural products. — Economic  effect  of  machinery. — Corporate 
farming. — Irrigation. — Effect  on  prices. — General  benefits. 
— Forests  and  fisheries. — Land  tenure. — References 75 

Chapter  III — Labor  as  a  Factor  in  Production. — Service  of 
labor. — Extent  of  the  labor  force. — Quality  of  the  labor 
force. — Various  grades  of  labor. — Division  of  labor. — Co- 
operation of  labor. — Increased  productivity  of  labor. — ^Im- 
proved condition  of  labor. — Labor  organization. — Protection 
of  labor. — Labor  laws. — Eight-hour  law  and  its  effect  upon 
production. — Restriction  of  immigration. — References 101 

Chapter  IV — Capital  as  a  Factor  in  Production. — Nature  of 
capital. — Non-capital  wealth. —  Saving  and  abstinence. — 
Fixed  capital  and  circulating  capital. —  Specialized  and  free 
capital. — Pure  and  concrete  capital. — Accumulations  of  cap- 
ital.— Momentum  of  capital. — Economic  significance  of  cap- 
ital in  production. — References 114 

Chapter  V — Production  Influenced  by  Social  Organization. — 
Private  organization. — The  firm. — The  corporation. — Trusts 
and  combinations. — Effect  of  organized  labor  on  production. 
— Effect  of  political  organization  on  value. — Increased  pro- 
ductivity on  account  of  organization. — References 122 


CONTENTS.  ^ 

PART   II. 
DISTRIBUTION   OF   INCOME. 

Chapter  I — Principles  of  Distribution. — Net  product. — Na- 
ture of  distribution. — Divisions  of  net  product. — Undivided 
net  product.— Law  of  equal  returns. — Dynamic  law  of  distri- 
bution.— How  the  gross  product  is  distributed. — Rights  of 
property. — Monopoly  privileges. — References 131 

Chapter  II — Rent  as  a  Factor  in  Distribution. — Rent  in  gen- 
eral.—  Contract  rent  and  economic  rent. — Cause  of  rent. — 
Manner  in  which  rent  arises. — Difference  in  the  fertility  of 
soil. — Favorable  location. — Limited  returns  to  agriculture. 
— Margin  of  cultivation. — Prices  and  rent. — Rent  does  not 
enter  into  the  cost  of  production. — Rent  and  free  land. — 
Economic  significance  of  free  land. — References 153 

Chapter  III — Wages  as  a  Factor  in  Distribution. — Labor  and 
the  cause  of  wages.— Pure  wages  distinguished  from  gross 
wages. — Real  and  nominal  wages. — Wage-fund  theory. — De- 
termination of  the  rate  of  wages. — Residual-claimant  theory. 
— Iron  law  of  wages. — Scientific  law  of  wages. — Competing 
groups. — Influence  of  labor  organizations  on  wages. — Busi- 
ness sense  and  wages. — Philanthropy  and  wages. — Eight- 
hour  day  and  its  effect  on  wages. — Gradual  increase  in  wages. 
— Improvement  of  wages  by  legislation. — Economic  signifi- 
cance of  wages. — References 164 

Chapter  IV — Interest  as  a  Factor  in  Distribution. — Nature  of 
interest. — Economic  interest  and  loan  interest. — Develop- 
ment of  theories  of  interest. — Interest  as  an  economic  factor 
in  distribution. — References 175 

Chapter  Y— Profits.— Gross  profits. — Pure  profits.— Competi- 
tion and  profits. — The  managing  class. — Profits  and  rent. — 
Pure  profits  and  market  prices. — Monopoly  profits  and  mon- 
opoly prices.— References 187 

Chapter  YI — Cooperation  and  Profii-Sharing  as  Processes  of 
Distribution. — Nature  of  cooperation. — Distributive  coopera- 
tion.— Productive  cooperation. — Distributive  cooperation  in 
England. — Productive  cooperation  in  England. —  Coopera- 
tion in  the  United  States  193 


V  CONTENTS. 

Chapter  VII — Labor  Organizations. —  Origin  of  labor  organi- 
zations.—Development  of  trade  unions. — Knights  of  Labor. 
— Objects  of  trade  unions. — Mistakes  of  unionism. — Result 
of  strikes. — Influence  of  trade  unions  on  wages. — Effective- 
ness of  labor  organization.— Arbitration  and  conciliation.— 
References  218 

Chapter  VIII — The  Doctrine  of  Socialism  and  the  Present  Eco- 
nomic System. — The  claims  of  socialism. — Adjustment  of  so- 
cial order.— Greek  ideal. — Roman  practice.— Thomas  More. 
— Prevalence  of  old  systems. — Modern  communism. — Etienne 
Cabet.— Modern  socialism.-Fourier.— State  socialism.— An- 
archism.— German  socialism. —  Socialism  in  America. — The 
inadequacy  of  socialism. — Reforms  proceed  from  local  gov- 
ernment.— Nature  of  progress. — No  formula  for  reform. — 
References 239 

PART  III. 

CONSUMPTION. 

Chaptbr  I— Nature  of  Consumption. — Consumption  regulates 
production. — Consumption  inseparable  from  production. — 
Variety  of  human  wants.— Degree  of  want.— Satisfaction  of 
economic  wants. — Immediate  consumption  and  final  con- 
sumption.— Productive  consumption. — Consumer's  profits. .  269 

Chapter  II —  Consumption  and  Saving. — Analysis  of  consump- 
tion.— Engel's  law. — Inducements  to  save. —  Spending  and 
saving. — Luxury.— Economic  expenditure  and  waste.— De- 
sirability of  saving. — Reform  of  consumption. — National 
consumption.- Sweating  system. — Waste  and  consumption,  275 

BOOK  III. 

Exchange  and  Industry. 

Chapter  I — Utility  and  Demand. —  Struggle  for  wealth. — 
Utility.— Demand  schedule.— Law  of  demand.— Market  de- 
mand.—  Competition 293 

Chapter  II— FaZue.— Definition.— Differences  of  opinion. — 
Free  goods  and  economic  goods. — Value  as  index  of  utility. 
— Theories  of  the  cause  of  value. — Utility  the  cause  of  value. 
— Objective  and  subjective  value.— Intrinsic  value 300 


COITTENTS.  7 

Chapter  111— Price. — Definition.— Manner  in  which  market 
price  is  established. — Market  interferences. — Laws  of  sup- 
ply.— Normal  price.— Limitation  of  prices.— Cost  of  produc- 
tion and  normal  price 310 

Chapter  IY— Money. — Beginnings  of  exchange. — Early  his- 
tory of  money.— Kinds  of  money.— Functions  of  money. — 
Measure  of  value. — Standard  of  value. — Deferred  payments. 
— Multiple  standard. —  Storage  of  value. — Principles  of  cir- 
culation.— Amount  of  money  needed  by  a  nation. — Monomet- 
alism.— Bimetalism. — Paper  money. — Paper  money  and 
bank  notes. — Monetary  history  of  the  United  States 323 

Chapter  V — Credit  and  Banking. —  Credit. — Definition. — In- 
strumentalities of  credit. —  Credit  and  value. — Advantages 
of  credit. — Credit  creates  capital. — Eflfects  of  overstrained 
credit. — Inflation  of  the  currency. — Banking. — Banks  as  cen- 
ters of  business.— Rise  of  banking.— What  constitutes  a 
sound  banking  system.— Bank  of  England.— Bank  of  France. 
— National  banks  of  the  United  States. —  Organization  and 
regulation. — Canadian  banking  system. —  Savings  banks. — 
Postal  savings  banks 343 

Chapter  VI — Processes  of  Exchange. —  Organization  of  ex- 
change.— Importance  of  exchange. — Means  of  exchange. — 
The  market.— Domestic  exchange.— Foreign  exchange.— In- 
ternational exchange 357 

Chapter  VII — Commercial  Crises  and  Panics. — Definition. — 
Course  of  trade  in  depression.— Trade  cycle. — Movement  of 
prices. — Warnings  of  an  approaching  panic. — Causes  of  low 
prices. — Protective  tariff  and  panics. — History  of  panics  in 
the  United  States. — Management  and  prevention  of  panics. .  369 

Chapter  VIII — Speculation. — Trade  in  securities. — Arbitrary 
corners  in  the  market. — Speculation  in  processes  of  distri- 
bution.— Illegitimate  speculation 396 

Chapter  IX — Transportation. — Effects  of  transportation. — 
Prices  equalized. — Equalizing  industry. — Economic  value  of 
cheap  transportation. — Advantages  of  water  transportation. 
—Railroad  problems. — Water  transportation  neglected. — 
Abuses  of  railroad  management. — Railroad  rates. — Railroad 
commissions. — ^Abuses  of  monopoly  profits. — References 407 

Chapter  X — The  Commerce  of  Nations. — The  Advantages  of  Com- 
merce.— Trade  among  Primitive  Peoples. — Commerce  of  Ancient 
Nations. — The  Phoenicians.— Medijeval    Commerce. — Nature    of 


CONTENTS. 

Mediaeval  Commerce. — Modern  Commerce. — The  Mercantile  Sys- 
tem.— ^National  Competition. — The  French  and  the  English. — Re- 
cent Commerce. — American  Carrying  Trade. — Development  of 
American  Commerce. — Causes  of  Commercial  Success. — Principles 
of  International  Trade 420 


BOOK   IV. 
Public  Economics. 

Chapter  I — Bestrictive  Measures. — Free  trade  and  free  com- 
petition.— Mercantilists. — Physiocrats. — Modern  restrictions 
upon  industry  and  trade. — Legislation  in  favor  of  labor, — 
Legislation  in  favor  of  commerce. — Legislation  in  favor  of 
industry. —  Government  restriction  of  monopolies. — Plane  of 
competition. —  Government  should  realize  to  the  people  the 
benefits  of  monopolies 443 

Chapter  II — Public  Control  of  Industries. — General  manage- 
ment of  industries. — Railroad  commissions. — Government 
ownership  of  railroads. — Lavv^s  controlling  corporations. — 
Municipal  ownership  of  gas-  and  water-vvorks. — Government 
management  versus  government  ownership. — Disposal  of 
public  franchises. — Economic  freedom  demands  restrictive 
laws. — The  modern  trust. — ^Government  by  injunction. — 
State  socialism. —  Significance  of  public  economics 449 

Chapter  III — Taxation  and  Revenue. — Relation  of  taxation 
to  private  economics. — Taxation  a  means  of  improving  eco- 
nomic processes. — Public  financiering. — Definitions. — Pur- 
poses of  taxation. — Canons  of  taxation. — Just  and  equitable 
taxation. — Incidence  of  taxation. —  Classification  of  taxes. — 
Poll  tax. — Income  tax. — Real  property  tax. — Personal  prop- 
erty tax. — Franchise  tax. — Inheritance  tax. — Indirect  tax  . .  463 

Chapter  IV — A  Rational  System  of  Finance  and  Taxation. — 
Irregular  development  of  finance  and  taxation. — Imperfec- 
tions of  modern  taxation. — Methods  of  collecting  revenues. 
— Double  taxation. — Taxation  of  corporations. —  Single  tax. 
— Land  and  income  tax.— Inequitable  assessment.— Methods 
of  collection. — Public  expenditures. — The  budget. — Public 
debts. — Imperfections  of  government  machinery. — Refer- 
ences   4S8 


CONTENTS.  \f 

BOOK  V. 

Methods  of  Economic  Investigation. 

Chapter  I — The  Field  of  Investigation. — Classification  of 
library  material. — Field  work. — Historical  investigation. — 
Scope  of  economic  investigation 511 

Chapter  II — Mode  of  Procedure. — Economic  purpose. — Gath- 
ering material. — Accounting  and  comparing. — Examples  of 
methods  of  investigation. —  The  labor  question. — Eailroad 
rates. — Interstate  commerce  law. — Railroad  accidents. — Ca- 
nals and  their  relation  to  railroads. — Productive  cooperation 
in  England. — Condition  of  packing-house  employees. — Mu- 
nicipal government  of  Berlin. — Prussian  railroad  system. — 
List  of  topics  for  investigation 517 


PREFACE. 


The  object  of  this  book  is  to  present  a  complete  working 
manual  for  students  and  instructors.  In  its  preparation 
the  writer  has  aimed  to  cover  the  entire  field  of  economics 
and  to  present  all  of  the  elements  of  the  science  in  a 
clear  and  concise  manner,  hence  he  has  made  no  attempt 
to  elaborate  particular  theories,  believing  it  to  be  better 
to  present  only  principles  that  have  become  permanently 
established. 

For  it  is  conceded  by  all  able  instructors  of  economics 
that  the  controverted  points,  involving  long  and  perhaps 
tedious  discussion  and  analysis,  should  be  studiously 
avoided  by  those  making  a  formal  beginning  of  the 
science.  It  is  also  considered  best  to  give  the  beginner 
a  survey  of  the  entire  field  before  allowing  him  to  enter 
upon  special  studies.  These  points  have  been  carefully 
observed  by  the  writer  in  his  class-room  and  in  the  prepa- 
ration of  this  book.  The  arrangement  of  the  subject- 
matter  in  the  book  corresponds  to  the  order  of  instruction 

in  the  class-room. 

(11) 


12  PREFACE. 

On  account  of  the  wide  scope  of  the  book  it  is  of  a 
necessity  much  condensed,  but  this  does  not  detract  from 
its  qualities  as  a  model  text-book,  which  should  consist 
of  a  well-arranged  course  of  study,  with  the  leading 
principles  of  each  subject  presented  in  short  paragraphs. 
The  text  is  thus  readily  supplemented  by  library  reading, 
and  investigation.  As  a  first  book  should  be  clear,  the 
writer  has  endeavored  to  present  every  economic  topic 
in  a  fair  and  proportional  manner,  and  at  the  same  time 
to  observe  a  simple  and  direct  style. 

Owing  to  the  excellent  bibliographies  now  published 
it  is  no  longer  necessary  to  make  an  extended  list  of 
references  in  an  ordinary  text,  therefore  only  a  few  of 
the  most  common  standard  works  have  been  referred  to 
at  the  close  of  each  chapter,  which  may  furnish  parallel 
and  explanatory  readings  on  the  subjects  included  in  the 
chapter. 

Book  V  is  placed  in  the  text  for  the  purpose  of 
encouraging  concrete  investigation,  a  practice  greatly 
needed  in  these  days  in  order  to  render  economics  of 
great  public  service  and  to  verify  and  illustrate  economic 
principles.  With  this  text  in  hand,  accompanied  with 
more  extended  discussions  by  the  instructor  of  special 
subjects  such  as  the  theories  of  value,  rent,  interest,  wages. 


PREFACE.  13 

profits^  and  distribution;  and  of  transportation^  taxation^ 
money^  trade  unions^  and  labor  organizations^  and  with 
collateral  reading,  the  student  will  have  a  thorough  prep- 
aration in  the  elements  of  economics. 

The  writer  wishes  to  acknowledge  the  valuable  assist- 
ance of  Professor  R.  W.  Cone,  of  the  University  of  Kan- 
sas, in  reading  manuscript  and  proof-sheets. 

FRANK  W.   BLACKMAR. 

University  of  Kansas. 


BOOK  L 


THE  NATURE  AND  SCOPE  OF  POLITICAL  ECONOMY. 


(16) 


CHAPTER  I. 

NATtJRE  AND  DEVELOPMENT  OF  ECONOMIC  LIFE. 

Nature  of  Economic  Life. 

A  pSiYt  of  the  general  activity  of  society  is  called  the 
ecoridmic  life,  because  it  treats  of  the  efforts  of  man  to 
obtain  and  use  material  things  called  economic  goods. 
Thete  is,  strictly  speaking,  but  one  life  of  man,  including 
hi^  entire  activities,  individual  and  social.  But  in  the 
consideration  of  the  different  phases  of  this  life  it  is  con- 
veiiient  to  designate  a  social,  individual,  intellectual, 
moral,  religious,  political,  or  economic  life.  Economic 
IHg  underlies  all  other  activities.  It  represents  man's 
struggle  to  improve  his  material  welfare.  It  began  with 
the  struggle  to  satisfy  hunger,  and  to  protect  against  cold, 
ftlid  has  continued  as  the  constant  factor  in  the  struggle 
of  the  race  for  supremacy.  While  the  economic  life  may 
not  be  considered  the  most  cherished  part  of  our  higher 
civilization,  it  is  the  most  essential.  It  is  a  great  means 
to  a  greater  end,  and  has  the  most  important  consideration 
of  any  phase  of  human  life. 

Observe  the  activities  of  modem  society  in  which  we 
live,  and  it  will  be  found  that  each  individual  is  struggling 
to  obtain  for  himself  a  larger  share  of  economic  goods. 
The  daily  wage-earner,  the  man  working  on  a  salary,  the 
manager  of  the  business,  the  capitalist  who  furnishes  the 
rileans  of  business,  and  the  person  endeavoring  to  make 
the  world  better,  each  is  striving  to  obtain 'economic  goods 
-2  (17)  ^  ''  '■'<  '    '-' 


18  ECONOMICS. 

or  wealth  to  satisfy  his  ends.  Indeed  the  larger  part  of 
the  time  of  man  is  spent  in  obtaining  food,  clothing,  and 
shelter,  for  these  wants  must  be  satisfied  before  the  higher 
products  of  civilization  can  be  realized.  Even  should 
literary  culture,  aesthetic  taste,  religious  fervor,  or  philan- 
thropic sentiment  represent  the  fruitage  of  the  best  life, 
yet  the  struggle  for  material  goods  is  the  uncompromising 
essential  of  human  existence.  This  activity  in  obtaining 
and  using  material  goods  is  called  the  economic  life. 

Unconscious  Cooperation  of  Society. 

The  economic  life  is  both  individual  and  social.  Man 
works  independently  to  satisfy  wants,  or  he  works  with 
his  fellows  for  the  same  purpose.  The  older  is  civilization 
and  the  more  prolonged  the  struggle,  the  more  men  work 
together  or  cooperate  in  the  production  of  economic  goods 
or  wealth.  In  one  sense  it  is  well  to  speak  of  the  individual 
power  and  the  independence  of  man;  in  another  it  is 
necessary  to  consider  him  as  dependent  upon  his  fellows. 
He  might  say:  "By  my  own  efforts  have  I  obtained  all 
this  wealth;  by  my  own.  efforts  have  I  accumulated  this 
store  of  knowledge  and  risen  to  this  position  in  life."  Yet 
from  another  standpoint  it  is  true  that  without  the  coopera- 
tion of  his  fellows  he  would  have  accomplished  but  little, 
for  while  he  has  been  seeking  his  own  interests  he  has 
been  unconsciously  cooperating  with  his  fellows.  There  is 
such  a  division  of  labor  in  the  accumulation  of  wealth  that 
a  man  is  dependent  upon  the  whole  world  for  the  wealth 
which  he  enjoys. 

Consider  the  simple  life  of  an  ordinary  laborer,  and 
while  his  services  are  essential  to  the  production  of  social 
wealthy  observe  how  much  he  depends  upon  others  for  what 


ECONOMICS.  IS 

he  uses.  From  the  tailor  or  clothier  he  receives  his  cloth- 
ing; from  the  grocer  or  butcher  his  food;  and  from  the 
furniture  dealer  the  articles  for  his  household.  But  follow- 
out  the  conditions  further,  and  we  see  that  the  tailor  de- 
pends upon  the  w^eaver,  and  the  weaver  upon  the  farmer 
who  supplies  wool  and  cotton.  In  each  case  the  farmer, 
weaver,  and  tailor  are  dependent  upon  the  baker,  cloth- 
ier, and  all  others  in  connection  with  them.  The  grocer 
obtains  his  flour  from  the  miller,  and  the  miller  the  wheat 
from  the  farmer,  and  the  machinery  to  run  the  mill 
from  the  machinist.  The  grocer  obtains  sugar  from 
the  refinery,  which  receives  it  from  the  factory  and  plan- 
tation. Even  the  spices,  which  form  rather  an  insignifi- 
cant part  of  the  necessaries  of  life,  have  passed  through 
many  groups  of  hands  before  they  are  furnished  to  the 
consumers.  Thus  the  ordinary  laborer  has  the  whole  world 
waiting  on  him  in  exchange  for  the  labor  he  furnishes. 

Thus  all  the  activities  of  the  economic  life  are  woven 
together  into  an  intricate  web,  and  the  individual  who 
apparently  works  alone,  independently  seeking  his  own 
welfare,  is  in  reality  a  cooperative  creature,  working  in 
connection  with  thousands  in  providing  the  necessaries 
and  luxuries  of  life.  His  service  to  the  world  may  be 
nothing  more  than  polishing  a  boot-heel  or  cutting  bolts 
in  the  machine  shop,  but  for  this  service  he  receives  his 
reward  in  a  multitude  of  ways. 

Competing  with  h.is  fellows  in  a  special  occupation,  he 
cooperates  with  them  in  general  production.  Competition 
of  class  with  class  is  after  all  but  a  method  of  the  division 
of  labor,  for  while  the  farmer  class  is  furnishing  the  raw 
material  for  other  groups,  farmers  are  receiving  clothing 
and  implements   and  manufactured   articles  from  other 


20  ECONOMICS. 

groups.  The  independence  of  the  farmer  has  become  pro- 
verbial only  because  he  possesses  the  means  of  the  food- 
supply  and  furnishes  the  raw  material,  and  possibly  be- 
cause, having  the  food-supply  and  raw  material,  he  may 
become  a  manufacturer  and  supply  his  needs  in  a  meager 
way.  But  in  the  complexity  of  modern  life  he  is  no  more 
independent  than  members  of  other  groups.  He  may  iso- 
late himself  and  live  a  slow,  independent,  and  non-pro- 
gressive life,  if  he  will,  but  he  is  not  apt  to  turn  civilization 
back  upon  itself  in  this  way.  He  is  as  much  affected  by 
division  of  labor  as  other  groups,  and  indeed  on  account 
of  the  modern  appliances  to  farming  it  may  be  said  eco- 
nomically that  he  is  a  manufacturer  of  grain,  fruit,  vege- 
tables, wool,  cotton,  and  sugar. 

Conscious  Cooperation  of  Society. 

Although  the  cooperation  of  individuals  in  economic  life 
began  unconsciously,  it  has  led  to  the  necessity  of  con- 
scious cooperation.  Men  lay  plans  and  work  together  in 
the  production,  distribution,  and  exchange  of  wealth.  This 
cooperation  is  mostly  carried  on  in  groups  of  individuals 
which  have  some  special  interests  in  the  same  thing.  Thus, 
a  group  of  laborers  unite  in  an  attempt  to  advance  their 
own  wages  and  their  own  interests,  and  to  receive  a 
larger  share  of  the  net  product  of  industry.  Another 
group  of  laborers  unite  in  a  special  enterprise  of  creating 
a  given  line  of  economic  goods,  such  as  boots  and  shoes, 
while  another  group  of  people  unite  in  a  cooperative  in- 
dustry of  trade,  and  still  another  group  unite  and  form  a 
bank,  by  which  they  aid  the  processes  of  exchange  in 
wealth-creating.  Others  unite  in  mining  enterprises,  rail- 
road-building, or  other  great  industries  where  one  person 


ECONOMICS.  21 

feels  unable  to  cope  with  circumstances;  and  finally  we 
may  say  the  state  itself  cooperates  with  all  industries 
within  the  boundary  of  its  own  jurisdiction.  Thus  we 
have,  besides  the  involuntary  or  unconscious  cooperation 
of  individuals  in  the  production  of  wealth,  an  organized 
or  conscious  cooperation  of  individuals  in  groups  carrying 
on  special  industries.  This  latter  tends  to  enforce  more 
clearly  the  idea  of  economic  interdependence  of  indi- 
viduals. 

Simplicity  of  Early  Economic  Life. 

At  first  the  economic  life  of  man  was  very  simple. 
Single-handed  he  began  the  struggle  to  satisfy  hunger  and 
protect  himself  against  the  cold.  In  primitive  social  con- 
ditions man's  selfish  nature  was  laid  bare.  He  began  his 
career  by  finding  things,  and  the  finder  was  possessor  and 
owner  if  he  had  the  strength  to  defend  his  property.  Roots 
and  berries  and  the  leaves  of  trees,  with  other  bits  of  food 
that  fell  to  his  lot,  he  devoured  to  sustain  life.  He  was  but 
a  wanderer,  living  an  uncertain,  nomadic  life,  with  no 
settled  place  of  abode  and  without  regularity  of  movements. 
Life  was  precarious,  for  he  was  gorged  at  one  time  and 
starved  at  another.  His  shelter  was  often  temporary; 
rocks  and  caves  or  rude  huts  of  bark  and  branches  were 
his  habitations.  Even  his  improvised  garments  gave  in- 
complete protection  to  the  body  from  the  rigors  of  the  cold 
and  the  heat  of  the  sun. 

Hunting  and  Fishing. 

Later,  man  learned  to  catch  fish  and  game,  and  hunted 
or  fished  in  packs  or  hordes.  These  new  industries  had 
immense  consequences  in  the  development  of  the  human 
race.     In  the  first  place,  they  gave  additional  food-supply, 


35:a  ECONOMICS. 

which  left  some  leisure  for  the  making  of  instruments  and 
implements  and  the  creation  of  better  houses  for  pro- 
tection. An  increased  food-supply  always  gives  to  men 
means  of  improvement;  it  is  the  first  step  forward  in 
material  civilization.  In  the  second  place,  it  developed  an 
adroitness  or  skill  in  the  struggle  for  existence.  The  per- 
petual struggle  in  the  accumulation  of  wealth  has  been 
along  the  line  of  the  mastery  of  nature.  As  a  man  learns 
to  master  or  outwit  it,  he  adds  the  means  of  his  own 
material  welfare  and  develops  intellect.  And  finally,  it 
may  be  said  that  fishing  and  hunting  led  to  association  in 
wealth-producing,  and  finally  developed  unconscious  co- 
operation in  obtaining  food.  Implements  were  made  and 
devices  contrived  by  means  of  which  to  accomplish  these 
ends  with  greater  ease  and  certainty. 

Domestication  of  Animals. 
After  a  while  man  enters  a  higher  state  of  existence,  and 
increases  his  food-supply  by  the  domestication  of  animals 
which  furnish  him  meat  and  milk  and  service  as  well. 
This  adds  greatly  to  his  leisure,  and  to  a  more  complete 
social  development.  The  race  has  multiplied  into  great 
family  groups,  which  settle  down  in  the  more  or  less  per- 
manent conditions  to  hunt  and  fish  and  tend  their  flocks. 
Wealth  is  now  more  easily  created  and  consequently  more 
abundant,  and  there  is  less  necessity  for  want  and  strife. 
The  social  organization  of  men  becomes  more  compact,  and 
the  conditions  of  labor  begin  to  prevail.  This  leads  to 
more  definite  cooperation  in  wealth-producing. 

Agriculture. 
Soon  a  new  period  of  progress  is  entered  upon  as  the 
knowledge  of  seed-planting  and  harvest  leads  to  agricul- 


ECONOMICS.  250 

ture.  The  fertile  soil  now  adds  to  the  food  product  and 
increases  the  means  of  human  welfare,  making  possible 
a  more  perfect  economic  life.  Man  is  rapidly  becoming 
a  cooperative  animal.  His  residence  becomes  fixed,  and 
his  wandering  ceases.  Settled  laws  and  customs  prevail, 
and  the  tribal  ownership  of  land  gives  security  to  all. 
More  goods  can  now  be  acquired  than  are  needed  for  bare 
subsistence,  and  the  conveniences  and  comforts  of  life  ap- 
pear, l^ew  economic  relations  spring  up,  and  the  divisions 
of  labor  begin  to  be  prominent  as  each  follows  a  special 
occupation.  In  its  effect  upon  civilization  agriculture 
has  a  vast  influence  in  developing  a  more  perfect  social 
life  and  a  better  political"  organization. 

Manufactures. 
With  increased  food-supply  the  desires  of  men  for  a 
variety  of  implements,  instruments,  wearing  apparel,  and 
a  larger  equipment  of  dwellings,  demand  the  especial  ser- 
vices of  part  of  the  community  in  manufactures.  And  so 
we  find  that  individuals  employ  their  whole  time  in  the 
creation  of  certain  lines  of  goods  to  exchange  for  goods 

of  other  lines. 

Trade. 

This  creation  of  more  goods  than  can  be  used  by  the 
producer  leads  to  trade.  The  surplus  goods  of  each  indi- 
vidual of  each  group  are  now  exchanged  for  articles  more 
desirable,  and  barter,  the  first  form  of  exchange,  appears. 
As  society  becomes  more  complex,  the  method  of  barter  is 
too  clumsy  for  carrying  on  the  trade  of  different  com- 
munities. This  leads  to  the  introduction  of  money,  which 
becomes  an  instrument  of  exchange.  Usually,  money  was 
some   common   commodity  whose   value   was   quite   well 


24 


ECONOMICS. 


known  to  all  traders  or  exchangers  of  goods.  By  means  of 
the  use  of  money,  trade  was  greatly  stimulated,  and  conse- 
quently manufacturing  increased.  In  seeking  those  arti- 
cles which  are  most  desirable  for  money  on  account  of 
convenience  when  large  values  must  be  considered,  the 
tribes  of  the  nations  of  the  world  finally  adopted  the 
precious  metals  as  money. 

Commerce. 
The  habit  of  exchanging  surplus  goods  leads  to  the  devel- 
opment of  commerce,  which  brings,  a  special  group  of 
people  to  attend  to  the  work  of  trading.  'Not  only  do  indi- 
viduals deal  with  individuals,  but  tribes  with  tribes,  and 
nations  with  nations.  Caravans  are  used  on  land  and  ships 
on  sea  for  carrying  the  surplus  goods,  and  each  new  ex- 
change stimulates  desire  and  develops  the  energy  of  men 
in  supplying  wants  already  created.  Thus  does  the  eco- 
nomic life  become  broadened  and  the  desire  of  men  for 
more  wealth  becomes  intensified. 

Economic  Organizations. 
In  the  early  period  of  development  we  find  society 
arranging  its  own  economic  groups, — the  agriculturists,  or 
those  who  till  the  soil;  shepherd  class,  or  those  who  tend 
the  flocks  and  herds;  and  the  trading  or  merchant  class. 
But  we  find  those  who,  on  account  of  their  skill,  spend  their 
entire  time  in  the  manufacture  of  goods.  The  two  latter 
classes  divide  into  many  special  groups,  the  traders  deal- 
ing in  a  single  article  or  group  of  articles,  and  the  manu- 
facturers confining  their  skill  to  a  single  product  or  group 
of  products.  As  economic  society  grows  more  complex, 
the  manufacturers  and  traders  group  themselves  in  towns 
and  cities.     The  farmers  are  usually  collected  in  villages 


ECONOMICS.  25 

and  country  hamlets.  Economic  life  shifts  again,  and  the 
manufacturers  and  laborers  in  special  industries  live  to- 
gether, and  subsequently  become  organized  into  guilds, 
which  represent  the  first  artificial  industrial  organizations. 
As  the  number  and  kinds  of  industries  multiply  and  the 
divisions  of  labor  increase,  society  tends  more  and  more  to 
arrange  itself  in  groups.  The  small  towns  and  villages 
grow  into  great  cities,  which  become  the  means  of  new 
associations.  The  guilds  in  these  cities  represent  the  or- 
ganization of  the  manufacturers  and  laborers  in  the  same 
commodity  or  the  same  industry  in  one  group  for  their 
own  protection  and  for  the  advancement  of  their  own  in- 
terests. The  importance  of  all  these  divisions  of  labor 
is  seen  in  the  rapid  development  of  economic  society  in  all 
branches.  Wealth  is  rapidly  increased  by  the  facilities  for 
its  production  and  the  excited  desire  of  mankind  every- 
where for  a  larger  supply  of  economic  goods.  Men  have 
more  to  live  for,  more  to  live  upon,  and  yet  are  more  de- 
pendent upon  the  exertions  of  their  fellows  for  what  they 
accomplish  in  the  general  processes  of  production. 

Industrial  Stage. 
With  the  impetus  now  given  to  economic  life,  man  enters 
upon  what  is  known  as  the  industrial  stage,  which  con- 
tinues to  the  present.  Prior  to  this,  nearly  all  of  the  manu- 
facture of  articles  was  dependent  upon  the  muscular  efforts 
of  man  and  beast.  Machinery  was  used  to  a  limited  extent, 
but  the  chief  manufacture  was  by  hand .  However,  the  in- 
troduction of  power  manufacture  was  the  beginning  of  a 
new  industrial  life.  By  the  use  of  machinery  and  the  con- 
trol of  the  powers  of  nature,  rapidity  of  manufacture  was 
increased  a  hundred  fold.      This  caused  the  introduction 


26  ECONOMICS. 

of  new  methods  of  production,  and  changed  to  a  great 
extent  the  conditions  of  economic  life. 
Industrial  Revolution. 

The  result  of  the  introduction  of  machinery  was,  that 
instead  of  the  manufacturer  working  in  his  home,  sur- 
rounded by  his  apprentices  and  journeymen,  great  fac- 
tories were  established,  with  improved  machinery,  in  which 
were  congregated  large  groups  of  laborers  who  worked  for 
wages.  Buildings  and  machinery  were  provided  by  the 
combined  efforts  of  capitalists,  and  laborers  worked  under 
the  direction  of  a  master.  Economic  society  now  arranges 
itself  in  new  groups  or  classes:  there  are  laborers,  mana- 
gers, and  capitalists. 

Under  the  old  method  goods  were  manufactured  in  the 
shop  in  small  quantities  and  placed  in  stock  for  sale. 
Under  the  new  method  large  quantities  of  goods  are  created 
in  a  single  factory  and  sold  to  dealers.  The  laborers 
receive  their  remuneration  in  the  form  of  a  daily  wage 
and  supply  their  own  homes,  living  apart  from  the  manu- 
facturers and  capitalists.  In  fact  a  large  number  of  the 
manufacturers  of  the  old  method  became  laborers  in  the 
factories  under  the  new.  This  was  the  formal  beginning 
of  the  wage  system  which  is  nearly  universal  at  present. 
The  divisions  and  subdivisions  of  labor  became  so  great 
that  it  took  a  large  number  of  workmen  to  complete  a 
single  article.  After  it  was  necessary  to  have  buildings 
and  machinery  to  carry  on  industry,  and  as  laborers  could 
not  furnish  these  without  a  system  of  cooperation,  which 
had  not  been  introduced,  they  were  obliged  to  rely  upon 
others  called  capitalists  to  construct  buildings  and  furnish 
machinery  and  raw  material,  while  they  accepted  a  daily 


ECONOMICS. 


37 


remuneration  for  their  services,  called  wages,  taking  no 
risks  of  loss  and  participating  in  no  gains.  The  rapid  de- 
velopment of  manufacturing  interests  with  the  use  of 
steam  and  improved  machinery,  the  increased  facilities 
of  transportation  by  means  of  canals,  waterways,  and  rail- 
roads, caused  such  constant  and  radical  changes  in  eco- 
nomic life  as  to  be  termed  an  industrial  revolution.  The 
large  amount  of  business  transactions  brought  about  the 
credit  system,  and  with  it  the  banking  industry.  Manu- 
factured products  increased  enormously,  the  agricultural 
area  was  greatly  extended,  trade  and  commerce  expanded 
in  extreme  proportions,  divisions  of  labor  were  greatly  in- 
creased. Facilities  for  transportation  kept  up  with  the 
general  improvement  in  other  lines,  while  industrial  en- 
terprises reached  greater  and  greater  magnitudes. 

Free  Competition. 

At  this  stage  of  progress  another  economic  phase  ap- 
pears. Under  the  old  guild  system  prices  were  regulated 
largely  by  custom  or  by  the  consent  of  the  guilds.  As  the 
guilds  had  much  influence  in  the  government  of  the  cities 
this  method  of  fixing  prices  became  a  law.  There  was 
known  the  just  price  and  the  fair  price  in  the  market,  fixed 
by  custom,  or  agreement,  and  finally  by  legal  enactment. 
On  account  of  the  scarcity  of  labor  at  certain  periods  the 
wages  varied  to  so  great  an  extent  that  the  price  of  labor  in 
the  market  was  also  fixed  by  custom,  agreement,  or  law. 

In  the  industrial  stage  these  restrictions  and  barriers 
were  broken  down.  All  tradesmen  and  manufacturers 
now  compete  with  their  fellows  in  the  market  for  the  sale 
or  purchase  of  goods,  and  prices  are  regulated  by  free 
competition.     Laborers  too  seek  the  highest  wages  their 


28  ECONOMICS. 

services  will  bring,  and  wages,  instead  of  being  established 
by  custom  or  law,  are  now  regulated  by  the  law  of  supply 
and  demand  or  by  market  rates.  The  abuses  which  crept 
in  through  the  attempt  to  regulate  wages  and  prices  by  law 
brought  forth  a  great  reaction.  It  was  finally  urged  by 
economic  thinkers  that  if  each  man  will  seek  his  individual 
interests  he  will  best  promote  the  common  interests  and 
the  common  good  of  society,  a  doctrine  true  only  in  part, 
for  the  immediate  interest  of  the  individual  may  not  always 
be  his  ultimate  interest  and  consequently  not  the  ultimate 
interest  of  the  community.  But  the  famous  "  laissez-faire  " 
assumption  that  government  should  cease  to  regulate 
prices  or  wages  by  law  after  it  had  expanded  into  the 
doctrine  of  non-interference  in  economic  processes,  leaving 
all  regulation  to  free  competition,  finally  prevailed.  For 
many  years  this  was  the  prevailing  doctrine,  and  indeed 
the  actual  practice  in  England,  and  became  the  formal  basis 
of  modern  political  economy.  The  rapid  economic  changes 
occasioned  by  what  is  known  as  the  industrial  revolution 
brought  great  injustice  by  the  irregularities  of  industry, 
and  in  many  instances  much  suffering  occurred  because 
people  could  not  adjust  themselves  to  the  new  conditions 
caused  by  these  sudden  changes.  Also,  the  rapid  produc- 
tion of  wealth  led  to  its  excessive  power,  created  discontent 
thereby,  and  finally  led  to  a  reaction  in  favor  of  restrictive 
measures.  Experience  demonstrated  to  many  that  the 
largest  conceivable  amount  of  economic  freedom  was  only 
secured  to  all  by  wise  restrictive  measures.  This  is  as 
true  of  economics  as  of  politics;  so  it  was  that  labor 
organizations  sprang  up  for  the  protection  of  the  rights 
of  the  laborers;  just  laws  are  passed  protecting  laborers 


ECONOMICS.  29 

and  capitalists,  securing  the  rights  of  both,  and  greater 
activity  on  the  part  of  the  state  in  the  supervision  of 
industry  and  in  the  protection  of  the  industrial  and  eco- 
nomic interests  of  its  subjects  has  obtained. 
Competition  in  Groups. 

General  competition,  which  began  so  severely  between 
individuals,  finally  changed,  through  the  process  of  shift- 
ing industry,  into  competitive  groups  which  are  consid- 
ered as  high-pressure  and  low-pressure  groups.  That  is, 
while  all  wage-earners  are  competing  with  one  another 
for  position,  this  competition  becomes  intense  as  it  is  nar- 
rowed down  to  a  single  industry,  and  reaches  its  maxi- 
mum when  several  are  competing  for  the  same  occupation 
in  a  given  factory.  Thus  the  hands  in  a  cotton  mill 
have  a  very  general  competition  with  the  hands  in  a 
woolen  mill,  and  much  less  with  the  hands  of  an  iron 
foundry,  but  the  cotton-mill  hands  are  in  a  sharp  competi- 
tion with  one  another,  and  this  becomes  a  high-pressure 
group  when  there  is  a  large  number  of  laborers  in  the 
cotton  industry  seeking  employment,  in  comparison  with 
the  number  of  places  to  be  filled ;  and  when  a  single  occu- 
pation in  the  mill  is  considered,  this  competition  becomes 
narrow  and  intense.  Thus  in  the  iron  factory  we  find 
another  competing  group  of  laborers,  and  within  this  many 
other  smaller  separate  competitive  groups. 

The  whole  effect  of  the  division  of  labor  at  first  is  to 
render  it  immobile.  Each  individual  seeking  for  employ- 
ment learns  to  do  one  thing  well,  which  may  be  a  small  part 
of  the  manufacture  of  a  single  article.  If  he  is  thrown  out 
of  employment  he  must  seek  a  place  in  other  competing 
groups  of  the  same  industry.    Failing  in  this,  he  will  seek 


30  ECONOMICS. 

other  employment  in  the  same  groups,  and  failing  in  this, 
he  will  endeavor  to  enter  other  industries,  for  which  ho 
has  no  skill;  consequently  he  must  take  a  lower  position. 
But  failing  in  all  of  these,  he  seeks  employment  among 
the  great  body  of  unskilled  laborers.  The  secondary 
effect  of  the  excessive  division  of  labor  is  to  break  down 
the  barriers  of  groups,  because  the  very  minuteness  of  the 
division  makes  it  possible  for  the  laborer  to  prepare  him- 
self in  a  short  time  for  the  occupation;  hence,  laborers 
may  more  readily  pass  from  one  group  to  another. 

The  division  of  labor  has  become  so  minute  that  it 
takes  a  man  of  intelligence  but  a  little  while  to  learn  how 
to  polish  a  boot-heel,  or  a  woman  to  make  a  certain  portion 
of  a  shirt,  or  of  a  laborer  to  attend  a  bolt-cutting  machine. 
Therefore,  while  the  introduction  of  the  so-called  labor- 
saving  machinery  has  a  tendency  to  disarrange  competi- 
tive groups  and  throw  laborers  out  of  employment,  the 
minute  division  of  labor  allows  them  to  shift  more  readily 
from  one  industry  to  another. 

Organization  of  Capital. 

The  introduction  of  power  manufacture  has  brought 
about  the  need  of  carrying  on  productive  enterprises  on 
a  great  scale,  and  this  has  led  to  the  organization  of  capi- 
tal, usually  in  the  form  of  corporations,  for  the  manufac- 
ture of  goods,  the  development  of  mines,  the  building  of 
railroads  and  canals,  and  the  purpose  of  trade.  All  this 
has  tended  to  bring  about  a  momentum  in  capitalistic 
production.  The  absolute  necessity  for  the  use  of  capital, 
and  the  fact  that  capital  takes  the  initiative  in  all  modern 
manufacturing  processes,  gives  it  an  immense  power  in  the 
modern  economic  life.    The  momentum  of  capital  in  itself 


ECONOMICS.  31 

is  also  great,  and  it  has  moved  forward  with  unrelenting 
selfishness  in  seeking  its  own  interests.  Hence  it  is  not 
on  account  of  the  undue  influence  of  any  individual  or 
class  of  individuals,  but  on  account  of  economic  conditions, 
that  the  overweening  power  of  capital  exists. 

Labor  Organizations. 

To  offset  this,  laborers  have  organized  themselves  into 
groups  to  protect  their  own  interests.  They  seek  to  meet 
the  monopolistic  power  of  capital  with  the  monopolistic 
power  of  labor.  While  they  realize  that  capital  is  essen- 
tial to  modern  productive  processes,  they  also  know  that 
nothing  can  be  done  without  labor.  They  claim  that  capi- 
tal has  received  more  than  its  just  reward  of  industry,  and 
to  obtain  what  belongs  to  labor  they  must  act  as  a  unit; 
that  is,  as  a  monopoly.  They  propose  to  raise  the  rate 
of  wages  by  forcing  employers  to  comply  with  their  de- 
mands, and  by  shutting  out  of  a  given  territory  all  com- 
petition of  labor.  These  two  facts  of  capitalistic  and  labor 
organizations  have  brought  into  the  economic  life  many 
questions  of  great  importance.  Two  forces  whose  interests 
are  essentially  the  same  in  the  process  of  production  have 
become  suddenly  antagonistic  on  account  of  supposed  dis- 
crepancy in  distribution.  But  the  combined  influence  of 
conscious  and  unconscious  organization  has  tended  to 
readjust  economic  conditions  of  life. 

The  State  and  Industry. 
The  apparent  irregularities  in  the  shaping  of  modern 
economic  society  caused  by  industrial  organization  has 
led  many  people  to  look  to  the  state  as  the  regulator  of 
all  industries,  until  the  relation  of  private  economics  to 
public  economics  has  become  one  of  the  great  questions  of 


32 


ECONOMICS. 


modern  political  economy.  Fundamentallj  the  state  is 
the  protector  and  regulator  of  all  industrial  cooperation 
in  all  economic  enterprises.  At  least,  its  policy  must  bo 
so  directed  as  to  secure  the  largest  amount  of  economic 
freedom  compatible  with  economic  justice  to  all  groups 
and  classes.  To  what  extent  the  state  must  go  in  industrial 
management  to  secure  this  end  is  one  of  the  problems  of 
modern  economic  life.  At  present  the  industrial  revolu- 
tion, or  more  properly  the  industrial  evolution,  still  goes 
on  with  ever-increasing  rapidity,  slowly  changing  the  as- 
pect of  modern  economic  life.  E'otwithstanding  the  tend- 
ency to  government  interference  or  regulation,  the  eco- 
nomic life  rests  to-day  essentially  upon  the  exercise  of  free 
competition.  Industrial  activities  have  been  greatly  multi- 
plied ;  industrial  life  has  been  greatly  extended ;  wealth 
has  increased  in  enormous  proportions,  until  the  study  of 
economic  life  and  the  laws  and  principles  controlling  it 
has  become  of  vital  importance. 

References:  Ely,  R.  T,,  Outlines  of  Economics ;  Ashley,  W.  J., 
English  Economic  History  and  Theory  ;  Cunningham,  W.,  Growth 
of  Engliih  Industry  and  Commerce ;  Ingram,  J.  K.,  A  History  of 
Political  Economy;  Toynbee,  Arnold,  Industrial  Revolution; 
Blackmar,  The  Story  of  Human  Progress ;  Carl  Biicher,  Industrial 
Evolution ;  Ely,  R.  T.,  Studies  in  the  Evolution  of  Industrial  Society. 


ECONOMICS.  83 


CHAPTER  II. 

THE  NATURE  AND  DEFINITION  OF  POLITICAL 
ECONOMY. 

Political  Economy  Treats  of  Economic  Life. 
Political  economy  considers  the  principles  and  laws 
of  economic  life,  or,  in  other  words,  the  principles  involved 
in  production,  distribution,  and  consumption  of  wealth, 
and  in  fact  all  the  activities  of  economic  society,  in  what- 
ever direction  they  may  operate.  It  has  to  do  especially 
with  wealth,  and  for  this  reason  is  sometimes  called  the 
science  of  wealth,  for  by  this  is  meant  the  observation, 
classification,  and  logical  arrangement  of  economic  phe- 
nomena and  the  principles  arising  from  man's  wealth- 
getting  and  wealth-using  capacities.  But  it  seeks  to  inter- 
pret the  phenomena  that  arise  from  man's  entire  economic 
activity.  While  the  accumulation  of  wealth  may  be  the 
primal  and  logical  idea  in  political  economy,  it  is  better 
to  place  man  in  his  economic  activity  in  the  foreground. 
He  is  the  central  figure  in  economic  life,  and  the  distribu- 
tion of  wealth  has  become  an  important  phase  of  political 
economy.  The  principle  of  distribution,  too,  is  one  of 
the  most  difiicult  and  important  of  all  within  the  scope 
of  political  economy.  While  the  production  and  distribu- 
tion of  wealth  must  always  be  carefully  considered,  the 
effect  of  these  processes  on  economic  society  must  not 
be  neglected. 
—3 


84  ECONOMICS. 

Political  Economy  ArisoB  from  Concrete  Economic  Life. 
It  has  been  observed  that  in  his  attempt  to  obtain 
wealth,  man  has  arranged  himself  in  groups  or  classes. 
A  multitude  of  industries  have  been  developed  which 
fall  into  two  groups  arising  from  manufacture  or  pro- 
duction of  wealth,  and  from  trade  or  the  exchange  of 
wealth.  Production  and  exchange  are  dependent  some- 
what upon  the  consumption  of  wealth  by  individuals,  and 
the  various  departments  of  industry  are  characterized  by 
the  distribution  of  wealth  or  the  amount  of  the  net 
product  which  each  one  receives,  whether  he  be  laborer, 
landlord,  capitalist,  manager  of  business,  or  cooperator. 
A  study  of  these  various  relations  of  man  in  the  economic 
process  has  brought  to  light  certain  principles  which  con- 
trol the  production,  distribution,  exchange,  and  consump- 
tion of  economic  goods.  These  principles  form  the  main 
topic  of  political  economy.  They  are  ascertained  through 
observation  of  concrete  instances  of  social  groups  and 
social  activities  in  the  economic  life.  These  principles 
are  abstracted  from  the  concrete,  and  become  an  inde- 
pendent body  of  knowledge  or  of  science  called  political 
economy. 

Principl9s  Arising  from  Man's  Economic  Activity. 
What  then  is  the  nature  of  the  principles  which  arise 
from  man's  economic  activity  ?  Political  Economy  would 
consider  production  not  only  an  effect,  but  would  find 
out  its  processes  and  the  principles  controlling  it.  It  would 
seek  not  only  to  find  the  means  of  production,  but  the 
methods  of  production  which  yield  the  highest  returns 
to  human  effort.  It  would  discuss  not  only  those  fac- 
tors and  powers  engaged  in  production,  but  would  find 


ECONOMICS.  35 

out  the  relative  importance  of  each  and  the  service  each 
performs;  it  would  seek  also  the  effect  of  the  actual  re- 
turns to  each  factor.  In  so  doing  it  would  find  that  the 
attempt  of  man  to  satisfy  wants  has  pursued  a  zigzag 
course  and  is  followed  hj  the  laws  of  production,  ex- 
change, and  distribution. 

Relation  of  Man  to  Wealth-Getting  and  Wealth-Uiing. 

Seeking  to  obtain  wealth  is  one  of  the  primal  conditions 
of  economic  life ;  seeking  to  use  it  is  another.  It  is  the 
relation  of  man  to  these  two  ideas  which  lays  the  founda- 
tion of  political  economy.  How  society  obtains  wealth 
and  how  it  uses  it  are  the  first  principles.  These  ideas 
give  rise  to  the  multitude  of  conditions  of  life,  and  tend 
to  demonstrate  principles  which  may  be  formulated. 
Wide  Bange  of  Economics. 

Political  economy,  although  a  compact  body  of  laws 
and  principles,  touches  a  wide  range  of  subjects.  It  treats 
of  the  methods  of  increasing  wealth  and  the  distribution 
of  the  same  among  the  various  classes  of  producers;  of 
the  exchange  of  economic  goods  and  of  their  consump- 
tion. It  treats  of  capital  and  interest,  labor  and  wages, 
of  money  and  its  circulation.  In  its  broad  scope  it  em- 
braces exchange,  credit,  and  the  principles  of  taxation. 
In  considering  the  laws  of  wages  it  treats  of  strikes  and 
combinations.  In  the  consideration  of  the  factors  of  pro- 
duction it  has  to  do  with  social  organizations  and  many 
other  economic  problems.  But  in  all  this  it  does  not  con- 
sider the  technology  of  wealth-getting. 

Teclinology  of  Wealth-Getting. 

Political  economy  is  interested  in  the  production  of 
coal  and  iron,  but  it  does  not  deal  with  the  technical  pro- 


36 


ECONOMICS. 


cess  of  their  manufacture  and  sale  at  a  profit  to  the  opera- 
tor. It  may  tell  how  a  nation  grows  wealthv,  bnt  it  will 
not  instruct  the  individual  in  the  process  of  the  accumula- 
tion of  goods  on  his  own  accoimt.  It  is  interested  in  the 
manufacture  of  goods,  but  it  will  not  explain  to  a  person 
the  process  of  cotton  manufacture,  nor  tell  how  he  can 
make  a  margin  in  wheat.  It  is  interested  in  the  wheat 
product  of  the  country  as  a  source  of  wealth,  but  has  noth- 
ing to  do  with  instruction  in  the  best  processes  of  agricul- 
ture. It  makes  no  attempt  to  say  whether  a  farmer  should 
raise  wheat  or  com  in  a  given  year,  or  whether  the  manu- 
facturer should  make  a  certain  grade  of  goods  for  the  mar- 
ket, but  it  does  investigate  the  laws  of  supply  and  demand 
and  the  conditions  of  wealth-getting  and  wealth-distribut- 
ing to  such  an  extent  that  a  person  studying  these  princi- 
ples may  have  a  larger  intelligence  in  the  technology  of 
wealth-getting.  It  does  direct  the  thoughts  toward  the 
business  world,  and  present  many  phases  of  the  economic 
life  with  which  the  business  man  and  the  citizen  should 

be  familiar. 

Creation  of  Utilities. 

The  production  of  wealth  consists  in  the  creation  of 
utilities.  Anything  that  is  useful  in  exchange  is  economic 
wealth.  Man  cannot  make  new  material;  he  can  only 
change  the  form  of  that  which  already  exists,  making  it 
more  adaptable  to  human  needs.  The  timber  of  the  for- 
est is  changed  into  furniture,  buildings,  and  articles  of 
use,  and  when  thus  changed  these  articles  become  wealth 
or  economic  goods.  So  too  in  the  production  of  raw 
material  on  the  farm,  man  cooperates  with  nature,  and 
the  substance  of  the  soil  and  of  the  air  is  changed  into 
corn  and  fruits;    under  his  direction  and  care,   nature 


ECONOMICS.  37 

works  for  him.  Whatever  is  used  by  man  to  satisfy  hu- 
man needs  is  utility,  is  wealth.  But  political  economy  has 
to  deal  with  those  things  about  which  we  economize. 
Things  in  a  state  of  nature  may  be  beneficial  to  man  as 
well  as  essential  to  his  life  and  existence.  That  is,  they 
may  be  so  free,  like  sunshine  and  water,  as  not  to  be  con- 
sidered as  wealth.  We  economize  about  those  things  of 
which  we  have  not  enough  without  the  effort  of  man. 
It  is  well  also  to  distinguish  between  that  which  is  useful 
merely  and  that  which  is  beneficial.  Many  articles  of 
wealth  may  be  greatly  desired  by  people  and  at  the  same 
time  may  not  be  beneficial  to  them  nor  conducive  to  the 
higher  welfare.  The  whole  process,  then,  of  the  creation 
of  wealth  consists  in  the  change  of  form  or  in  the  change 
of  place  of  goods,  or  indeed  the  change  in  the  conditions 
surrounding  wealth,  which  tend  to  enhance  its  value. 

Principles  and  Laws  of  Political  Economy. 
Political  economy,  then,  investigates  the  laws  which 
arise  from  economic  phenomena.  It  seeks  to  lay  down 
guiding  principles  for  the  better  management  of  public 
and  private  wealth.  It  is  not  all  theory ;  it  is  not  specu- 
lation, but  deals  with  principles  and  laws  and  their  appli- 
cation. Through  practice  in  wealth-getting  people  arrange 
themselves  in  economic  groups  representing  both  the  in- 
dividual and  the  group  in  the  process  of  the  creation  of 
wealth.  These  classes  had  no  idea  of  creating  a  political 
economy  or  establishing  laws  for  their  own  control,  but 
unconsciously  through  long  practice  and  habit  there  grew 
up  certain  usages  which  became  the  foundation  of  princi- 
ples controlling  economic  life  as  practiced  by  men  in  their 
relations  to  each  other.     These  principles  lie  at  the  foun- 


38  ECONOMICS. 

dation  of  the  practices  of  nations,  in  the  creation  of  wealth, 
or,  in  production,  distribution,  and  exchange. 

Political  Economy  is  a  Science. 
Political  economy  is  a  young  science,  scarcely  a  century 
old,  and  has  all  the  defects  and  irregularities  of  a  growing 
science.  But  just  as  chemistry  grew  out  of  alchemy,  as 
astronomy  came  from  astrology,  and  all  science  from  the 
speculations  of  ancient  philosophers,  so  a  well-developed 
science  of  political  economy  has  arisen  from  irregular 
economic  life  and  unsystematic  economic  thought.  Its 
claim  to  be  a  science  rests  in  the  fact  that  it  is  a  classifiod 
and  systematized  body  of  knowledge.  It  has  well-estab- 
lished principles  and  laws,  and  it  follows  scientific  meth- 
ods in  its  investigations.  Phenomena  may  be  observed, 
facts  collected  and  classified,  and  laws  deduced  in  politi- 
cal economy  as  well  as  in  chemistry,  botany,  geology,  and 
other  natural  sciences.  The  laws  of  political  economy 
might  also  be  considered  natural, — natural  social,  not  nat- 
ural physical  laws.  They  are  not  the  results  of  human 
investigations, — they  are  the  results  of  human  activity. 
The  chief  difficulty  arises  from  the  fact  that  society  con- 
stantly changes,  while  the  elements  of  nature  remain 
constant.  Oxygen  once  discovered  is  oxygen  tlfe  world 
over,  wherever  found,  and  always  the  same.  l^ow  the 
chemist  in  his  experiments  will  always  succeed  if  the  con- 
ditions are  right.  So  too  will  the  economist  succeed  if  the 
conditions  are  followed;  the  laws  will  operate  with  pre- 
cision. But  the  chemist  can  manipulate  the  elements  of 
nature  at  will,  the  entomologist  can  dissect  a  bug,  but  the 
economist  cannot  well  experiment  upon  society,  though  he 
may  observe  and  classify  its  phenomena.     But  in  every 


ECONOMICS.  39 

ase,  with  the  economist  as  well  as  with  the  chemist,  con- 
[itions  must  be  fulfilled  or  the  law  will  not  operate.  The 
hemist  has  this  advantage, — that  he  can  change  condi- 
ions ;  while  the  economist  must  wait  for  society  to  change 
tself. 

Again,  society  is  an  organism  which  grows,  not  as  a 
ree  grows,  in  a  passive  state,  but  partly  by  the  law  of 
nind,  by  the  avarice  and  desires  of  men  who  compose 
ociety.  Therefore  the  economist  looks  for  deflecting 
orces  in  the  movement  of  society,  wrought  by  man's  intel- 
3ct  and  will ;  for  example,  the  discovery  and  use  of  steam, 
^hich  changed  the  whole  economic  aspect  of  society.  But 
an  economics  determine  the  future  by  the  application  of 
ts  laws  ?  No  more  than  any  other  science.  Mathemati- 
ians  studying  the  heavenly  bodies  can  determine  their 
hapes  and  motions,  demonstrating  with  exactness  their 
irogress  through  the  heavens;  but  there  is  regularity  in 
heir  movements.  The  movement  of  society,  however,  is 
hat  of  an  irregular  curve,  and  while  its  general  course 
[lay  be  determined,  its  exact  movement  is  difficult  to  ascer- 
ain  unless  the  deflecting  forces  can  be  estimated. 

Definition  of  Political  Economy. 

Political  economy  has  been  defined  as  the  science  of  eco- 
Lomic  life,  or  more  especially,  the  science  of  the  phenom- 
na  which  arise  from  economic  life.  It  treats  of  man 
n  his  wealth-getting  and  wealth-using  capacity.  It  in- 
olves  all  the  methods  and  principles  of  economic  activity. 

The  efforts  of  man  to  satisfy  wants  by  securing  material 
bjects  may  be  called  the  economic  life,  and  a  systematic 
reatise  of  these  efforts  makes  the  science  of  economics. 
Che  terms  ^Tolitical   Economy"    and   "Economics"    are 


40 


ECONOMICS. 


commonly  used  interchangeably,  while  in  reality  there  is 
a  growing  divergence  in  their  meaning.  The  former  par- 
took more  of  the  nature  of  philosophy,  with  possibly  some 
features  of  art,  while  the  latter  has  broadened  into  a 
science;  or  as  Political  Economy  has  become  more  scien- 
tific and  enlarged  its  scope  it  has  taken  on  the  name  Eco- 
nomics. There  is  more  or  less  contention  as  to  which  is 
the  broader  term.  In  this  work  Economics  is  considered 
rather  broader,  as  it  might  include  some  items  not 
especially  and  strictly  included  in  the  science.  There 
are  many  conditions  in  which  the  two  words  may  be 
interchangeable,  and  others  in  which  it  would  seem  better 
to  make  "Economics"  the  broader  term. 

Positions  Assumed  by  Adam  Smith  and  His  Followers. 

Adam  Smith  placed  wealth-getting  in  the  foreground, 

and  considered  lightly  distribution  in  its  relation  to  labor. 

Eicardo,    Senior,   and  others  followed  him,   and  shaped 

English    Political    Economy    after    this    model.      John 

Stuart    Mill,    of    the    school    of    Eicardo,    Cairnes,    and 

Smith,  increased  the  importance  of  the  distribution   of 

wealth.     But  the  great  industrial  revolution  referred  to 

placed  man  in  the  foreground,  making  him  the  central 

figure  of  economic  lif^,  so  that  to-day  the  distribution  of 

wealth  has  become  one  of  the  most  important  principles 

of  economics. 

Trend  of  Modern  Economics. 

Modern  economics  each  year  reaches  a  far  different  po- 
sition as  it  has  a  tendency  to  consider  mian  in  his  entire 
economic  life.  It  covers  a  broad  field  simply  because 
man^s  economic  life  has  broadened,  and  the  science  built 
from    concrete   phenomena   follows   the   development    of 


ECONOMICS. 


41 


the  phenomena.  It  has  gone  so  far  in  the  relation  of 
man  to  wealth  that  it  has  considered  his  well-being.  But 
in  all  this  the  principles  of  Political  Economy  wrought 
out  on  a  basis  of  free  competition  have  changed  but  little. 

Economic  Fact  and  Theory. 

Various  theories  have  been  propounded  about  interest, 
rent,  wages,  and  in  fact  all  the  various  phases  of  economic 
life.  These  theories  are  based  upon  certain  principles, 
or  at  least  upon  principles  representing  a  separate  body 
of  laws  distinct  from  the  theories  and  recognized  by  every 
one.  In  the  modern  world  we  look  about  us  and  find  a 
verification  of  laws  and  principles  and  the  substance  of 
theory  in  economic  facts. 

References:    See  end  of  Chapter  III. 


42 


ECONOMICS. 


CHAPTER  III. 

THE  SCOPE  AND  METHODS  OF  POLITICAL  ECONOMY. 

Field  of  Political  Economy. 
The  study  of  political  economy  will  follow  wherever 
man  leads  in  the  creation  of  wealth.  Yet  there  are  many 
phases  of  social  and  political  life  which  are  not  in  them- 
selves distinctly  economic,  and  which  are  entirely  excluded 
from  the  range  of  economics.  Many  facts  of  the  economic 
life  may  he  traced  out  in  eifects,  on  the  society  at  large, 
which  would  not  he  considered  within  the  province  of  po- 
litical economy.  It  begins  and  ends  with  wealth.  Around 
wealth  cluster  all  the  principles  of  political  economy; 
though  it  is  not  merely  the  production  and  distribution  of 
this  wealth  in  itself,  but  in  its  relation  to  man,  which 
yields  the  highest  form  of  science.  Political  economy  may 
occupy  in  part  the  same  field  as  political  science,  history, 
or  sociology.  But  while  it  looks  for  its  data  in  these  fields 
and  draws  from  them  its  principles  and  laws,  its  boundary 
as  a  science  is  entirely  distinct. 

Boundary  of  the  Science  is  Subjective. 

Like  all  other  sciences,  the  boundary  is  subjective.  In 
defining  the  boundary  of  any  science  we  must  find  first 
the  principles  and  the  foundation,  what  end  is  to  be  sought, 
and  the  logical  processes  which  it  follows.  Thus  botany, 
biology,  and  chemistry  may  be  found  in  the  same  field, 
but  they  are  entirely  different  sciences,  with  distinct  sub- 
jective boundaries.    The  purpose  of  the  science,  its  method 


ECONOMICS. 


43 


of  using  data,  and  its  logical  process  mark  the  finer  dis- 
tinctions from  other  sciences. 

Narrow  Ccncoption  of  the  Science. 

In  dealing  with  political  economy  there  are  thousands 
who  advocate  its  narrow  range.  They  hold  that  it  em- 
braces a  few  abstract  principles  and  theories  arising  orig- 
inally from  concrete  economic  life  and  becoming  the 
foundations  of  a  deductive  science  from  which  certain 
other  laws  and  principles  are  deduced,  or  which  applied  to 
the  economic  life  will  furnish  the  principles  for  its  guid- 
ance. This  narrow  conception  of  political  economy  will 
exclude  the  relation  of  economic  life  to  ethical  standards 
or  to  political  usage.  It  would  confine  political  economy 
to  the  narrow  boundary  of  abstract  thought  and  theory. 
Hence  it  would  not  attempt  any  such  thing  as  practical 
or  applied  economics. 

Liberal  Conception. 

Others  will  give  to  political  economy  a  broader  concep- 
tion, and  take  in  everything  that  relates  to  man  and  eco- 
nomic life.  Indeed,  many  write  so  freely  as  to  mingle 
ethics  and  political  economy  all  the  way  through  their 
writings,  and  others  confuse  political  economy  with  public 
economy, — thus  involving  political  science  and  public  ad- 
ministration along  with  the  subject  of  political  economy. 

Outline  of  Economics. 

It  is  easy  to  observe  that  the  subject  may  be  made  too 
narrow  by  one  classification,  or  too  broad  by  another.  A 
fair  outline  of  economics  would  insist  on  a  two-fold  classi- 
fication, to  include  the  various  parts  of  the  whole  subject. 
First,  according  to  the  nature  and  logic  of  the  subject,  we 
have  pure  or  abstract  political  economy,  which  embodies 


44:  ECONOMICS. 

the  principles  of  the  science  which  have  been  formed  in 
the  process  of  abstraction  from  concrete  economic  life; 
and  second,  applied  or  concrete  economics. 

The  latter  is  sometimes  called  practical  economics,  be- 
cause it  deals  with  actual  economic  phenomena ;  although 
one  part  of  economics  cannot  be  said  to  be  more  practical 
than  another,  for  the  student  is  never  without  the  theory 
and  principles  before  him.  Applied  economics  seeks  to 
verify  the  principles  of  pure  economics  by  concrete  exam- 
ples; to  inquire  into  the  state  of  modern  economic  life 
either  through  general  or  special  investigations,  to  de- 
termine the  best  standard  of  economic  life  and  to  con- 
sider the  possibility  of  reaching  the  desired  ends.  In  the 
consideration  of  the  last  phase  we  enter  the  realm  of  ethics 
and  politics.  The  field  of  economics  would  not  be  entirely 
covered  without  the  important  branch  of  the  history  of 
economic  thought.  It  is  only  by  a  consideration  of  the 
views  of  different  economists  and  schools  of  economy  that 
we  really  obtain  a  proper  conception  of  the  science. 
Going  hand  in  hand  with  this  branch  is  industrial  history^ 
which  follows  in  the  concrete  the  material  prosperity  of 
nations  and  states.  This  branch  must  not  be  neglected  by 
the  student,  for  it  reveals  to  him  the  basis  of  the  science 
as  the  history  of  economic  thought  shows  how  the  princi- 
ples of  the  science  have  been  abstracted  and  formulated 
from  the  concrete  economic  life. 

For  the  purposes  of  study  it  is  well  to  consider 
the  second  classification,  according  economic  agencies 
(1)  into  private  or  social  economics,  and  (2)  into 
public  or  political  economics.  The  former  refers  to 
all  non-political  activities  carried  on  by  individuals  or 
by    combinations    of    individuals.      It    includes    nearly 


ECONOMICS.  46 

all  of  modern  industry  in  its  manifold  departments, 
and  represents  the  field  of  operation  of  the  laws  of  political 
economy.  It  is  within  this  department  that  the  laws  of  pro- 
duction, distribution,  and  exchange  are  manifest  under  free 
competition.  On  the  other  hand,  public  economics  has  to 
do  with  all  of  those  relations  of  wealth-getting  and  wealth- 
using  in  which  the  state  exercises  a  peculiar  agency.  Car- 
ried to  its  fullest  extent,  this  department  of  economics 
touches  political  science.  However,  in  its  consideration 
only  economic  principles  should  be  taken  into  account. 
Wherever  the  state  operates  industry  for  profit,  whether 
the  gain  is  applied  in  furnishing  a  cheaper  service  to  the 
people  or  whether  it  is  reserved  as  a  surplus  to  be  applied 
to  some  other  form  of  public  expenditure,  the  state  acts 
as  an  economic  agent,  and  as-  such  performs  a  political 
as  well  as  an  economic  function.  It  is  possible,  however, 
to  apply  the  principles  of  pure  economics  to  this  as  well  as 
to  other  economic  agencies,  with  the  probable  condition  of 
monopoly  in  the  place  of  free  competition.  It  is  not  nec- 
essary that  there  should  be  any  confusion  in  the  treatment 
of  public  economics  with  politics  or  political  science,  for 
separate  sciences  may  deal  with  the  same  data  for  different 
purposes  and  in  a  different  way.  The  boundaries  of 
sciences  are  subjective,  or  psychological,  and  are  not  lim- 
ited by  concrete  phenomena.  Hence  two  or  more  sciencciS 
may  overlap  one  another  in  the  field  of  operation  without 
destroying  their  autonomy  nor  in  the  least  interfering  with 
one  another.  Thus,  take  the  subject  of  trusts:  having 
certain  data  given,  the  subject  may  be  considered  as  to 
(1)  economic  ejects,  (2)  social  effects,  or  (3)  as  to 
political  remedies.  The  first  will  belong  to  economics,  the 
second  to  sociology,  and  the  third  to  political  science,  ac- 


46  ECONOMICS. 

cording  to  the  method  of  investigation  and  the  purpose 
of  the  science.  While  it  is  well  to  consider  economics  as 
a  complete  and  compact  science,  the  classification  of  the 
different  branches  will  lead  to  a  better  formula  or  plan  of 
study,  and  will,  moreover,  reveal  more  readily  the  real 
purposes  of  the  science.  The  scheme  presented,  then,  is 
as  follows: 

ECONOMICS. 

A. — Classification  according  to  nature  and  logic  of  the 
science : 

(1)  Pure  or  abstract  Political  Economy. 

(a)   Laws,  principles,  and  theories. 

(2)  Applied  economics. 

(a)  Verification  of  laws  and  principles 
in  concrete  economic  life. 

(&)  Practical  investigation  into  econom- 
ic phenomena,  general  or  special, 
and  classification  and  deduction 
of  the  same. 

(c)  Consideration  of  ideal  standards 
and  the  means  of  approximating 
them. 

(3)  History  of  economic  thought. 

(4)  Industrial  history. 

(5)  Methodology  of  the  science. 
B. — Classification  according  to  agencies : 

(1)  Private  or  non-political  economics. 

(2)  Public  or  political  economics. 

(a)  Public  control  of  industries. 

(b)  Taxation  and  finance  so  far  as  re- 

lated to  economics. 


ECONOMICS.  4:7 

The  Pure  Science. 

Pure  science  treats  of  fact,  logically  stated.  The 
method  employed  must  be  deductive  and  hypothetical, 
although  it  is  based  upon  observation.  Although  the  pura 
political  economy  represents  the  fundamental  principles 
of  the  science  and  is  necessary  for  the  full  understanding 
of  economic  phenomena,  it  is  inadequate  to  the  solution  of 
practical  problems.  Although  its  laws  may  be  of  universal 
application  in  a  general  way,  they  must  be  applied  to 
suit  each  particular  case.  The  theory  itself  excludes  time, 
place  and  circumstance,  and,  if  it  is  to  be  applied,  one  or 
more  of  these  must  be  considered. 

It  is  well,  however,  for  the  sake  of  convenience,  to 
make  two  great  divisions  of  the  subject,  allowing  the  pure 
science  to  stand  alone  as  the  abstract  or  rational  part,  and 
applied  or  concrete  political  economy  as  a  second  great 
division.  The  former  has  for  its  object  the  mass  of  social 
facts  as  a  whole,  with  a  view  of  discovering  their  causes 
and  deducing  general  laws  therefrom.  It  is  sometimes 
called  deductive  political  economy,  and  is  well  represented 
in  the  old  school  of  economists,  of  whom  Mill  and  Ricardo 
are  excellent  representatives.  As  it  is  theoretical,  it  must 
apply  its  principles  and  rules  to  the  normal  man,  the 
typical  nation,  and  normal  conditions,  if  results  are  to 
be  expected.  There  are  certain  principles  which  are  uni- 
versal in  their  application  in  all  conditions  of  society  at 
all  times,  even  though  there  are  constantly  changing  social 
conditions.  These  principles  admit  of  logical  arrangement 
and  logical  deductions,  being  based  upon  human  actions 
and  human  conditions  from  which  they  have  been  ab- 
stracted.    They  serve  in  turn  as  established  principles  for 


48  ECONOMICS. 

the   deduction   of   other   principles   of   economic   science. 
While,  primarily,  political  economy  is  based  upon  experi- 
ence, the  real  principles  have  been  abstracted  and  logically 
stated  therefrom.     Yet  as  political  economy  is  a  growing  ■, 
science,  the  economist  cannot  be  a  mere  theorizer,  much  \ 
less  a  dreamer.     He  must  be  a  practical  observer.  \ 

The  economist  is  frequently  called  a  doctrinaire,  or  a 
scholastic  dreamer.  Perhaps  some  years  ago  political 
economists  dwelt  more  upon  theoretical  discussion  of  laws 
and  less  upon  practical  work  than  at  present.  Political 
economy  certainly  was  treated  as  a  theory  rather  than  as  a 
science,  but  more  recently  the  study  has  assumed  the  pro- 
portions of  a  science.  Its  chief  study  is  the  investigation 
of  truth  rather  than  the  development  of  any  particular 
theory.  A  doctrinaire  is  one  who  follows  a  doctrine,  hence 
a  strong  partisan  is  likely  to  be  a  doctrinaire ;  a  true  scien- 
tist cannot  well  be  one.  He  must  follow  the  truth  wher- 
ever it  leads  him,  whether  it  agrees  with  theory  or  not. 
It  is  hardly  the  business  of  the  economist  to  follow  the 
gold  doctrine,  the  free-silver  doctrine,  free-trade  doctrine, 
tariff  doctrine,  or  fiat-money  doctrine,  or  in  fact  any  other 
doctrine,  as  absolute  remedies  of  existing  evils.  These 
must  all  be  left  for  politicians  ■  and  statesmen.  In  the 
search  for  truth  and  the  presentation  of  the  principles  of 
economic  science,  the  economist  must  hold  to  a  positive 
side  of  principles  and  rules  which  form  the  body  of  the 
science;  nor  must  he  depart  from  any  of  these,  unless  a 
shifting  of  society  should  so  modify  them  that  they  could 
not  be  accepted  in  their  entirety.  When  Adam  Smith 
wrote  The  Wealth  of  IN'ations,  his  mind  was  centered  on 
the  economic  conditions  of  the  England  of  his  time.     He 


ECONOMICS.  49 

took  England  as  the  typical  nation,  the  Englishman  as  the 
typical  man,  and  consequently  sought  to  lay  down  prin- 
ciples which  were  universal  and  that  were  true  for  the 
economic  conditions  of  all  nations.  Ricardo  followed,  giv- 
ing concentration  and  body  to  the  main  principles  of  eco- 
nomic philosophy;  while  John  Stuart  Mill  gave  even  a 
greater  elaboration  of  general  principles.  Adam  Smith 
has  been  called  the  founder  of  the  deductive  method. 
He  also  has  been  called  the  originator  of  the  historical 
school  of  political  economy.  In  fact,  nearly  every  school 
of  economic  thinkers  draws  something  from  the  Wealth  of 
E"ations  to  substantiats  its  position.  In  truth,  while  he 
was  a  student  of  actual  conditions  of  society,  the  principles 
he  formulated  were  based  upon  economic  fact,  and  his 
deductions  were  so  general  as  to  be  applied  to  all  conditions 
of  society.  While  Ricardo,  Cairnes,  Senior,  Mill  and 
others  elaborated  the  deductive  side  of  his  economy, 
Malthus  and  the  German  school  of  Roscher,  Hildebrand 
and  Knies  have  developed  the  concrete  side,  which  has 
also  led  to  the  development  of  the  historical  school  of 
political  economy.  While  every  economist  must  use  the 
principles  of  the  deductive  science  as  a  basis  of  operation, 
it  is  only  in  the  realm  of  concrete  economics  that  we  ob- 
tain practical  results. 

Concrete  Economics. 
It  is  only  by  the  application  of  the  science  to  actual  life 
that  we  verify  its  laws.  By  it  both  premises  and  conclu- 
sions are  constantly  tested  by  experience.  Indeed,  by  gen- 
eralization of  facts  all  these  laws  are  obtained.  In  either 
case  concrete  economics  seeks  and  formulates  laws  that 
operate  over  a  given  period  of  time,  and  given  territory  or 


60  ECONOMICS. 

given  social  state.  As  we  enter  this  field  of  concrete  or 
applied  economics  there  may  be  several  lines  of  operation. 
First,  we  may  seek  a  general  verification  of  the  principles 
of  pure  economics  by  applying  these  to  specific  cases.  In 
this  method  examples  are  sought  for  illustration  of  prin- 
ciples. In  the  second  place,  we  may  extend  the  study 
to  historical  experience;  and  this  process  becomes  one 
of  pure  induction.  It  treats  of  ideal  standards  for 
given  questions,  and  draws  its  conclusions  for  the 
support  of  the  same  from  the  realm  of  economic 
history  and  statistics.  It  considers  not  only  the  nature 
of  economic  society  and  what  it  ought  to  be,  but  also 
enters  the  field  of  ethics.  If  it  passes  on  to  the  demon- 
stration of  the  ways  and  means  of  changing  the  trend  of 
economic  life  or  the  enforcement  of  artificial  law  con- 
trolling economic  customs,  it  enters  the  field  of  politics. 
From  the  study  of  political  economy  there  have  come  two 
standards ;  there  have  developed  what  are  known  as  the  old 
and  new  schools,  or  the  deductive  and  inductive^  or  the 
scientific  and  historical  schools.  Although  these  divisions 
are  not  identical,  they  show  the  general  trend  of  thought: 
one  in  its  adherence  to  abstract  principles  of  political 
economy;  the  other  to  the  concrete  or  historical  side  of 
economic  life. 

Practical  Economics. 

If  we  consider  a  third  phase  of  economic  study  we 
shall  enter  by  it  into  practical  economics,  an  important 
branch  of  applied  economics.  In  this  a  particular  case, 
limited  in  time  and  condition  of  society,  is  considered  in 
regard  to  its  nature,  history,  justness,  and  proposed  change. 
Such,  for  instance,  as  the  city  ownership  of  waterworks  in 


ECONOMICS.  51 

a  given  town.  It  is  a  case  of  statistical  inquiry  and  of 
concrete  investigation ;  therefore  it  differs  from  the  inves- 
tigation into  pure  theory. 

The  underlying  principles  of  abstract  political  economy 
may  be  brought  to  bear  upon  the  case  to  show  how  far 
they  apply.  Indeed,  it  is  impossible  to  carry  on  any  eco- 
nomic investigation  in  the  field  of  applied  economics  with- 
out being  thoroughly  versed  in  the  principles  of  the 
science ;  although  in  applied  economics  the  solution  of  the 
concrete  problem  is  the  objective  point.  This  comes  as 
essentially  within  the  scope  of  the  science  of  political 
economy  as  does  the  abstract  theory.  Dogmatists  have 
tried  to  draw  hard  and  fast  lines  between  the  pure  eco- 
nomics and  the  applied,  discarding  either  one  or  the  other. 
Some  have  gone  so  far  as  to  consider  the  principles  of 
political  economy  to  be  only  the  customs  and  habits  of 
people  as  portrayed  by  economic  history,  thus  annihilating 
the  body  of  the  science.  But  political  economy  has  a 
service  to  perform,  and  the  economist  will  stop  short  of 
his  duty  if  he  does  not  point  out  in  the  concrete  world  the 
actual  effect  of  economic  law,  ascertaining  what  ought  to 
be,  by  which  he  advances  upon  pure  ethics,  and  suers^est  to 
what  extent  economic  usage  could  be  modified  by  law. 

Problem  of  Political  Economy. 

From  the  foregoing  conclusions  it  may  be  stated  that 
the  great  problem  of  political  economy  may  be  included  in 
^ye  leading  points  as  outlined  in  Prof.  Wagner's  Lehr- 
buch:     1.    The     description     of    economic     phenomena; 

2.  The  explanation  of  the  causes  upon  which  they  depend ; 

3.  The  determination  of  the  standard  by  which  their  social 
merit  may  be  measured ;   4.  The  setting  up  of  an  aim  for 


52  ECONOMICS. 

economic  progress;  5.  Examination  of  the  ways  and 
means  for  attaining  this  end.  Thus  \ye  see  that  applied 
economics  has  in  itself  a  wide  field,  and  it  could  not  well 
be  ignored.  The  study  of  economic  phenomena  and  the 
arrangement  and  classification  of  material  must  be  carried 
on  with  as  much  zeal  in  economics  as  in  the  natural 
sciences.  There  should  be  a  scientific  method  and  a  scien- 
tific spirit,  and  a  desire  to  know  the  truth  for  the  truth's 
sake.  This  must  be  either  through  the  investigation 
of  historical  fact  in  connection  with  the  best  economic 
development,  or  with  the  statistics  of  present  economic  con- 
ditions. 

Mistakes  in  Terminology. 

In  the  study  of  political  economy  of  any  kind  there  are 
great  difficulties  to  be  encountered,  and  one  of  the  greatest 
is  that  it  is  all  clothed  in  terms  common  to  everyday  life. 
Fallacious  reasonings  are  on  this  account  more  frequent 
in  political  economy  than  perhaps  in  any  other  science. 
The  phenomena  with  which  it  deals  are  all  every-day  occur- 
rences and  intermingled  with  the  common  pursuits  of  in- 
dividuals and  their  material  interests.  Everybody,  there- 
fore, thinks  he  is  a  political  economist  because  he  sees 
something  of  the  nature  of  the  material  upon  which  the 
science  operates.  But  while  we  may  use  the  terms  interest, 
wealth,  wages,  capital,  and  profits  in  every-day  sense,  there 
frequently  is  a  peculiar  economic  signification  attached  to 
each  of  these  terms  in  the  science.  Many  writers  indeed 
use  these  terms  indiscriminately.  As  for  example,  the 
use  of  the  term  "  profits,"  which  may  be  either  necessary, 
temporary,  or  personal  or  monopoly  profits;  or  it  may 
be  used  as  gross  profits,  or  net  profits.     It  is  difficult  to 


ECONOMICS.  53 

determine  what  is  meant  by  the  unqualified  use  of  the  term 
"  profits.''  In  every  instance  it  is  necessary  to  discrimi- 
nate very  carefully  as  to  the  specific  meaning  in  each  sense 
used  before  an  economist  can  be  understood. 

Ethics  and  Economics. 

E'early  all  writers  on  political  economy  have  been  forced 
to  dispose  in  one  way  or  another  of  the  subject  of  ethics. 
One  group  of  writers  have  held  that  ethics  has  nothing  to 
do  with  economics  whatever ;  that  pol  itical  economy  proper 
never  questions  what  is  right,  what  is  just,  or  indeed  in  any 
sense  the  duty  of  man  to  man.  It  simply  inquires  into 
what  actually  occurs  and  what  are  the  principles  concern- 
ing the  occurrence.  Another  school  hold  that  ethics  gives 
man  his  chief  factor  in  the  economic  life;  that  his  duties 
to  his  fellows  should  be  considered  in  every  economic  ac- 
tion ;  and  so  in  their  writings  all  the  way  through  we  find 
ethical  ideas  introduced.  Another  group  would  exclude 
ethics,  relegating  it  to  the  realm  of  applied  economics. 

It  certainly  can  be  demonstrated  that  the  pure  principles 
of  political  economy  have  nothing  to  do  with  ethics.  Theo- 
ries of  wages,  interest  and  rent  are  not  questions  for 
ethical  consideration,  and  in  the  discussion  of  these  theories 
it  appears  proper  that  ethical  considerations  should  be  en- 
tirely excluded.  However,  it  appears  there  have  been 
thrust  into  the  economic  world  ethical  considerations.  It 
is  impossible  to  give  the  full  effect  of  the  science  without 
considering  the  ethical  standard.  ISTo  science  has  per- 
formed its  service  to  humanity  until  it  hwl  been  applied 
to  actual  life;  until  it  considers  the  standard  and  results 
of  right  or  wrong  actions.  The  justice  of  certain  economic 
processes  is  entitled  to  consideration,  but  in  order  that  this 


54  ECONOMICS. 

ethical  consideration  shall  not  interfere  with  the  standard 
of  the  pure  science,  it  is  well  to  exclude  it  entirely  from 
the  principles,  and  make  a  separate  division  which  shall 
consider  under  the  head  of  applied  economics  the  question 
of  what  ought  to  be. 

Politics  and  Economics. 

The  term  "  political  economy ''  is  somewhat  misleading 
when  it  is  really  known  that  there  is  very  little  politics 
in  it  according  to  the  modern  term.  There  is  a  popular 
notion  that  political  economy  means  preeminently  the  dis- 
cussion of  the  questions  of  tariff,  free  trade,  and  an  advo- 
cacy of  a  national  policy  of  one  or  the  other  of  these  doc- 
trines ;  or,  since  the  late  discussion  of  the  money  question, 
the  chief  province  of  political  economy  is  a  determination 
of  what  kind  of  currency  a  nation  should  use.  In  the 
e-reat  body  of  economics,  politics  has  no  position  whatever. 
Treating  of  value  and  utility,  of  the  laws  of  supply  and 
demand,  of  rent  and  wages,  questions  of  state  activity  to 
enforce  all  these  laws  may  not  be  considered.  However, 
if  it  is  permissible  in  applied  economics  to  admit  the 
question  of  ethics  and  consider  what  ought  to  be  the  stand- 
ard of  justice  in  economic  production  and  distribution,  it 
may  be  permissible  to  go  a  step  farther,  and  point  out  to 
what  extent  the  state  may  advance  the  interests  of  man  by 
developing  a  more  perfect  economic  system.  Thus  ethical 
politics  may  be  considered  in  the  development  of  economic 

science. 

;^\jlt:  '^f^te  and  Public  Economics. 

The  great  body  of  political  economy  is  called  private 

economics,  because  it  deals  with  economic  life  independent 

of  state  activities.     It  refers  to  the  laws  and  principles 


ECONOMICS.  55 

developed  by  man,  individually  or  in  groups,  in  the  wealth- 
getting  or  wealth-using  process.  It  has  nothing  to  do  with 
public  policy.  It  is  sometimes  called  social  economics  as 
distinct  from  the  policy  of  states.  English  writers  and 
most  of  the  German  writers  on  political  economy,  as  well  as 
the  Americans,  have  adhered  especially  to  private  econom- 
ics as  distinct  from  public,  while  the  French  writers  have 
interwoven  their  political  economy  largely  into  a  public 
policy  of  administration.  Public  economics  treats  of  the 
relation  of  state  activity  to  the  economic  life.  It  includes 
the  principles  of  finance  and  taxation,  because  these  are 
administered  by  the  government  and  have  certain  bearings 
upon  the  economic  life.  Wherever  the  government  has  in- 
terfered with  trade,  industry,  commerce,  labor  or  wealth, 
in  restricting  or  advancing  its  operations,  we  come  in  con- 
tact with  public  economics.  Hence  it  appears  that  no 
political  economy  is  complete  without  a  consideration  of 
this  phase  of  economic  life.  Indeed,  public  economics  be- 
comes of  late  years  more  and  more  important. 

Sociology  and  Economics. 

By  some,  political  economy  is  called  a  branch  of  sooi^ 
ology.  Evidently,  political  economy  is  social  science  be- 
cause it  deals  with  the  relation  of  men  in  their  associated 
capacity.  But  that  sociology  should  be  considered  the  ge- 
neric term,  of  which  political  economy  is  one  of  the  sub- 
jects, is  hardly  permissible  in  the  present  development  of 
sociology.  It  would  be  better  to  insist  that  political  econ- 
omy has  been  differentiated  from  the  great  body  of  social 
sciences,  just  as  political  science  has  been  differentiated, 
and  that  sociology  stands  alone  as  a  compact  science,  one 
among  a  group  of  sister  sciences  of  which  political  economy 


5G 


ECONOMICS. 


is  an  important  member.  Sociology,  political  economy,  and 
political  science  may  operate  in  the  same  concrete  field  but 
still  be  distinct  sciences,  separated  from  each  other  in  aims, 
processes,  and  conclusions. 

Effect  of  Social  Orgranization. 

The  effects  of  social  organizations  in  the  economic  life 
are  very  great.  The  organization  of  human  society  on  a 
religious  basis  with  the  central  idea  of  promoting  the  relig- 
ious, moral  and  spiritual  interests  of  mankind,  may  have  a 
vast  influence  on  the  development  of  economic  life,  interfer- 
ing directly  with  the  supply  and  demand  of  economic  goods, 
and  indeed  with  the  actual  practices  in  the  economic  world. 
So,  too,  every  direct  social  organization  that  may  be  estab- 
lished may  have  a  vast  influence  upon  economic  conditions. 
And  especially  is  this  true  of  the  great  organization  called 
the  state.  Organized  especially  for  political  purposes 
alone,  for  the  protection  of  property  and  the  advancement 
of  the  general  interests  of  the  people  at  large,  it  has  a  vast 
influence  over  economic  production  and  distribution,  and 
also  in  modern  times  has  had  much  to  do  with  the  regula- 
tion of  distribution.  And  while  it  has  not  entered  largely 
into  the  process  of  the  economic  life  or  sought  to  interfere 
with  it  to  any  great  extent,  certain  laws  and  restrictions 
have  been  established  which  tend  to  modify  the  principles 
of  political  economy.  At  least,  if  it  has  not  interfered 
with  competition  directly  it  has  arranged  a  state  by  which 
it  proposes  to  determine  the  plane  of  competition,  and  sets 
its  limitations.  This  we  can  observe  in  the  establishment 
of  maximum  prices  for  gas  and  water,  maximum  freights 
and  fares,  the  regulation  of  the  interests  of  labor  or  cor- 


ECONOMICS.  57 

porations,  and  other  specific  points  which  show  to  what 
extent  the  state  has  attempted  to  regulate  industry. 

Objects  Sought  in  Political  Economy. 
The  chief  object  sought,  then,  in  political  economy  as  a 
study,  is  to  determine  the  principles  and  laws  which  con- 
trol the  economic  life,  to  verify  these  principles  by  concrete 
examples,  and  to  carry  the  study  into  the  investigation  of 
the  modern  economic  life.  It  should  not  stop  here,  but 
investigate  most  thoroughly  all  economic  problems,  whether 
theoretical  or  practical,  reaching  a  final  solution  in  each 
case.  As  to  the  general  effects  of  the  study  of  the  science, 
it  ought  to  create  intelligent  citizens  and  statesmen, 
and  prepare  all  for  the  position  of  cooperators  in  the 
economic  and  political  life.  As  a  means  of  discipline  there 
can  possibly  be  no  better  subject  anywhere  in  the  whole 
university  curriculum.  It  requires  scientific  thought,  close 
investigation,  careful,  philosophical  reasoning,  and  excess- 
ive power  of  determination.  Possibly  there  may  be  to-day 
somewhat  of  an  indefiniteness  to  the  science,  owing  to  the 
fact  of  conflicting  opinions  respecting  its  development. 
But  all  human  life  is  a  science  of  probabilities,  and  a  study 
of  these  questions  prepares  one  more  especially  for  specific 
living  in  cooperative  society  than  does  that  of  a  study  of 
natural  science,  which  applies  less  directly  to  the  social 
wants  of  man. 

Methods  of  Study. 

There  are  two  great  methods  of  the  study  of  political 
economy.  One  is  to  begin  with  the  concrete  examples,  and 
approach  by  degrees  the  nature  of  economic  society,  observ- 
ing the  principles  as  one  passes  along.  That  is,  to  approach 
it  from  the  inductive  standpoint,  gathering  facts  and  mak- 


68  ECONOMICS. 

ing  generalizations  from  these  facts,  applying  the  laws 
which  have  already  been  demonstrated  of  specific  things. 
Another  way  is  to  take  up  the  study  of  the  principles  of 
political  economy  as  laid  down  in  the  works  of  the  older 
economists,  and  master  them ;  and  then,  to  master  the  va- 
rious theories  that  have  been  advanced  from  time  to  time, 
and  having  done  this  to  turn  the  attention  to  the  application 
of  these  principles  to  actual  life.  To  those  well  ma- 
tured by  years  of  study  there  can  be  no  question  that 
the  study  of  the  theoretical  and  abstract  principles  of 
political  economy  should  be  first,  followed  by  a  study 
of  the  higher  theory  and  with  it  the  history  of  economics, 
and  after  that  a  careful  investigation  of  the  problems 
of  modern  economic  life.  It  would  be  well  to  study  the 
principles  of  taxation  as  related  to  economic  theory  along 
with  the  principles  of  political  economy,  and  to  leave 
public  economics  in  the  real  sense  to  the  last,  in  con- 
nection with  the  study  of  concrete  problems. 

References:  Cossa,  Luigi,  Introduction  to  the  Study  of  Politi- 
cal Economy;  Keynes,  J.  N,,  Scope  and  Method  of  Political 
Economy;  Nicholson,  J.  S.,  Political  Economy  as  Branch  of 
Education;  Patten,  S.  N.,  The  Educational  Value  of  Political 
Economy ;  Jevons,  W.  Stanley,  The  Theory  of  Political  Economy ; 
Cairnes,  J.  E.,  The  Character  and  Logical  Method  of  Political 
Economy;  Marshall,  A.,  The  Present  Position  of  Economics; 
Laughlin,  J.  Lawrence,  The  Study  of  Political  Economy ;  Fetter,  F.  O., 
Principles  of  Economics. 


BOOK  II, 


PRODUCTION,  DISTRIBUTION,  AND  CONSUMPTION. 


PART  I. 

FACTORS  AND  PROCESSES  OF  PRODUCTION. 


CHAPTER  I. 

THE  NATURE  OF  PRODUCTION. 

Unity  of  the  Economic  Process. 
Production  is  the  greatest  fundamental  economic  pro- 
cess, although  in  a  general  way  there  is  unity  of  all  eco- 
nomic processes.  The  general  divisions  of  production, 
exchange,  distribution  and  consumption  are  merely  parts 
of  one  great  life.  The  divisions  have  been  made  chiefly 
for  the  purpose  of  analysis  and  instruction.  Actually, 
there  are  no  distinct  and  unchangeable  boundaries  between 
these  great  divisions.  The  permanence  with  which  they 
have  been  held  to  by  economic  writers  has  frequently 
led  young  students  to  wrong  impressions  of  the  true  nature 
of  underlying  processes.  A  man  may  be  a  producer,  an 
exchanger,  a  transporter,  a  consumer  of  goods,  while  at  the 
same  time  he  is  a  factor  in  economic  distribution.  While 
this  unity  of  economic  process  is  evinced  on  all  sides,  it  is 
nevertheless  true  that  persons  specialize  along  certain  lines 
of  work.  There  are  those  who  are  manufacturers  of 
goods;  others  who  are  producers  of  raw  material;  still 
others  who  devote  their  sole  time  to  the  transportation 

(61) 


62  ECONOMICS. 

of  goods;  and  others  indeed  who  are  mere  exchangers; 
while  each  and  every  one  is  a  representative  in  the  eco- 
nomic process  of  distribution.  It  is  convenient  to  recognize 
the  process  of  the  creation  of  wealth  in  any  form  what- 
ever as  production,  and  to  characterize  every  other  process 
of  economic  life  by  some  special  name,  as  exchange,  dis- 
tribution, etc. 

Character  of  Production. 

As  before  stated,  production  consists  in  the  creation  of 
utilities,  or  indeed  in  the  creation  of  economic  goods  or 
wealth.  It  consists  in  the  transforming  of  raw  materials 
into  forms  of  utility  and  beauty  for  the  satisfaction  of 
human  wants.  Primarily  it  is  the  application  of  labor 
to  what  is  termed  nature,  to  make  it  yield  a  service  to 
mankind.  By  nature  is  meant  all  those  physicial  forces 
which  can  be  used  for  the  service  of  man  and  all  those 
climatic  and  physical  conditions  which  modify  his  en- 
vironment. First  of  all  we  have  land,  which  yields 
through  its  fertility  vegetable  foods  to  support  the  life 
of  man  and  beast.  It  also  yields  mineral  products  from 
underneath  the  soil.  In  this  connection,  too,  we  have 
water,  which  yields  the  service  of  sustaining  life,  en- 
ables us  to  transport  goods  from  one  place  to  another, 
and  yields  a  force  with  which  to  propel  machines.  We 
have  another  form  of  nature,  which  is  also  used  as  a  pro- 
pelling force,  primarily, — the  muscular  strength  of  ani- 
mals which  have  been  domesticated  for  man's  service.  And 
finally,  through  man's  inventive  genius  we  have  the  use  of 
steam  and  electricity,  two  of  the  greatest  forces  of  nature. 

We  have  also  inorganic  substances,  the  components  of 
the  earth's  crust,  which  are  included  in  what  we  call  raw 


ECONOMICS.  63 

material.  Building-stones,  clay,  chalk,  salt,  coal  and  pe- 
troleum and  other  sources  of  wealth,  when  once  converted 
into  useful  products,  make  up  a  large  proportion  of  the 
wealth  of  the  community. 

We  have  also  organic  substances,  which  are  found  in 
the  forest  already  produced  by  nature  in  plants  and  veg- 
etables of  every  variety,  which  are  made  available  by  the 
process  of  labor.  The  whole  work  of  production  consists 
only  of  changing  the  place  or  the  form  of  material.  Man 
has  always  brought  to  his  aid  through  his  inventive  genius, 
tools  and  machines  to  supplement  his  lack  of  muscular 
force.  Beginning  with  muscular  force,  he  has  domesticated 
the  animals  and  added  their  service  to  his  own  limited 
ability.  He  has  harnessed  the  winds  and  the  water,  and 
thus  increased  the  active  forces.  He  has  utilized  the 
expansive  power  of  steam  and  other  vapors  and  gases; 
he  has  utilized  the  principles  of  heat  and  electricity,  and 
thus  added  to  his  own  great  productive  power.  How  far 
he  will  continue  in  the  increase  of  his  power  of  produc- 
tion, yet  remains  to  be  seen.  Whether  or  not  atmosphere, 
heat,  and  ether  may  not  yet  be  added  to  electricity  and 
steam  in  different  forms,  and  these,  accompanied  with 
man's  inventive  genius  in  the  creation  of  machines  and 
tools,  will  add  to  the  power  of  production  until  again  it 
shall  be  increased  one  hundred  fold,  remains  to  be  seen. 

Creation  of  Wealth. 
In  an  economic  sense,  wealth  includes  all  those  useful 
articles  which  supply  the  wants  of  man.  It  matters  not 
whether  they  may  be  always  beneficial  in  this  use,  or  not. 
If  they  satisfy  some  known  wants,  though  in  the  long  run 
their  effect  may  be  deleterious,  the  articles  assume  the 


64  ECONOMICS. 

form  of  economic  goods,  and  are  called  wealth.  A  dis- 
crimination should  be  made  at  once  between  the  common 
signification  of  the  term  wealth,  meaning  the  relative 
amount  of  property  which  a  man  owns,  and  the  economic 
use  of  the  term  wealth.  In  the  latter  sense  it  means  any 
form  of  economic  goods  or  utilities,  such  as  tools,  articles 
of  apparel,  buildings,  food,  ornaments,  or  anything  which 
satisfies  the  wants  of  man.  The  man  who  owns  the  shovel 
with  which  he  labors  is  wealthy  in  the  economic  sense,  to 
the  amount  of  the  shovel,  just  as  the  man  who  owns  great 
machines  and  buildings  and  tools  and  railroads  is  wealthy 
to  that  extent. 

The  sum  total  of  the  wealth  of  a  community  is  found 
by  an  estimate  of  the  net  private  wealth  of  individuals 
plus  the  net  public  wealth  of  the  nation.  Sometimes 
those  articles  which  are  classified  as  personal  or  private 
wealth  may  be  nothing  more  than  an  evidence  of  an  in- 
debtedness which  must  be  accounted  for  in  the  inventory 
of  the  wealth  of  each  and  every  person.  Thus,  a  mort- 
gage may  be  considered  as  the  private  wealth  of  an  in- 
dividual, but  in  the  estimation  of  the  private  wealth  of 
another  individual,  upon  whose  property  the  mortgage  is 
made,  it  must  be  considered  as  an  evidence  of  indebtedness. 
Thus  the  person  who  holds  a  government  bond  may  be 
considered  wealthy  to  that  extent,  but  in  the  estimate  of 
national  wealth  the  same  government  bond  must  be  en- 
tered as  evidence  of  indebtedness. 

The  creation  of  wealth  has  increased  rapidly  within 
recent  years,  for  its  process  is  necessarily  cumulative. 
Each  year  adds  new  processes  of  labor,  new  kinds  of 
machinery,    and    new   methods    of    development.      Each 


ECONOMICS.  66 

year  adds  a  large  amount  of  capital  engaged  in  produc- 
tive processes,  which  adds  momentum  to  wealth-producing 
and  increases  in  geometrical  ratio  the  power  of  wealth. 

Who  Are  Producers? 
It  is  a  popular  opinion  that  those  persons  who  are 
transforming  raw  materials  into  the  finished  product  and 
those  who  are  engaged  in  the  production  of  agricultural 
and  mineral  products  through  the  aid  of  nature  are  all 
producers  and  all  others  non-producers.  According  to 
this  notion  the  capitalist,  the  merchant,  the  banker,  the 
lawyer,  the  minister,  are  all  classed  in  the  great  group 
of  non-producers.  The  Physiocrats  estimated  the  produc- 
tivity of  toil  by  the  proportion  of  useful  raw  materials 
secured,  as  in  farming,  stock-raising,  mining,  lumbering, 
and  so  forth,  and  they  stigmatized  all  other  occupations 
as  barren  because  they  were  sustained  by  the  surplus  prod- 
ucts of  the  land.  Prior  to  them  the  mercantilists  con- 
sidered all  industry  as  productive  only  in  proportion  as 
it  tended  to  enlarge  the  nation's  stock  of  money.  Adam 
Smith  and  John  Stuart  Mill  called  all  exertion,  however 
useful  it  might  be,  which  does  not  take  the  form  of  creat- 
ing some  useful  material  object  or  fixing  and  realizing  it- 
self in  such  object,  unproductive .  It  has  been  the  tendency 
of  English  economists  to  follow  Smith  and  Mill,  while 
the  French  school  of  philosophers  have  held  to  the  doc- 
trine that  all  labor  is  productive  that  imparts  economic 
modifications  to  material  nature,  by  man.  Some  of  the  Ger- 
man writers  go  even  farther  than  this,  and  define  every 
form  of  labor  as  productive  which  society  is  willing  to 
pay  for;  as  Roscher  states  it,  "Every  service  which  is 
rationally  sought,  and  duly  paid  for,  is  productive." 


66  •  ECONOMICS. 

All  members  of  society  who  are  performing  a  service 
which  has  exchangeable  value,  or  creating  exchangeable 
goods,  may  be  called  producers.  It  is  quite  the  popular 
error  these  days  to  suppose  that  farmers,  for  instance,  are 
more  a  producing  class  than  merchants,  bankers,  manu- 
facturers, or  transporters  of  goods.  The  farmer,  it  is  true, 
produces  food  for  the  merchant,  but  the  merchant  ex- 
changes clothes  for  the  goods.  If  it  were  not  for  the  mer- 
chant the  farmer  would  be  obliged  to  leave  his  work  and  ob- 
tain his  clothes  from  the  clothier  personally.  Or  if  it  were 
not  for  the  manufacturer  he  would  be  obliged  to  do  as  he 
did  in  the  olden  time,  allow  his  wife  to  manufacture  it 
for  him.  Also,  the  farmer  would  manufacture  his  own 
tools,  and  it  would  occupy  much  time  which  could  be  used 
more  advantageously  in  the  tilling  of  the  soil.  It  is  sim- 
ply a  question  of  the  division  of  labor,  in  which  the  farmer 
says,  "  I  will  raise  the  wheat  and  exchange  it  for  cloth- 
ing, implements,  furniture,  flour;  and  all  the  food  that  I 
need,  which  does  not  grow  upon  my  land."  Possibly  the 
farmer  has  it  within  his  power,  if  he  chooses,  to  become 
independent  to  a  greater  extent  than  any  other  individual, 
for  in  a  meager  way  he  is  the  source  of  all  production. 
^Nevertheless,  without  turning  civilization  back  upon  itself 
he  must  remain  dependent  upon  others,  who  cooperate 
with  him  in  the  process  of  production. 

Nature  of  Wealth. 
Wealth  consists  of  the  utilities  in  the  form  of  economic 
goods  which  are  formed  by  shaping,  combining  or  placing 
the  various  elements  of  nature.  This  wealth  has  some- 
times been  classified  as  material  and  immaterial.  Ac- 
cording  to   this   classification,   material   wealth   includes 


ECONOMICS.  67 

tangible  goods  that  may  be  exchanged  in  the  market; 
immaterial  wealth  refers  to  forces  and  conditions,  such 
as  superior  skill,  talent,  or  endowment,  good-will  in 
business,  and  certain  forms  of  credit.  It  appears 
that  it  is  better  to  discriminate  very  carefully  be- 
tween wealth  and  the  individual;  that  is,  between  wealth 
and  the  conditions  of  wealth.  If  wealth  consists  in  the 
well-being  of  man  in  his  relation  to  material  goods,  it  is 
necessary  in  political  economy  to  understand  that  wealth 
is  "objective  to  the  user,  material,  useful  and  exchange- 
table."  These  are  the  four  essential  characteristics  of 
wealth.  Wealth,  too,  is  material,  because  those  things 
which  are  immaterial  cannot  be  well  measured,  and  wealth 
can  be.  Only  those  things  which  are  said  to  be  useful  and 
exchangeable  can  be  said  to  be  wealth,  and  by  useful  we 
mean  things  that  are  used,  not  necessarily  things  that  are 
beneficial.  It  is  sometimes  said  that  people  sell  the  good- 
will of  a  business,  and  therefore  that  the  good-will  of  a 
business  should  be  considered  immaterial  wealth.  A  care- 
ful analysis  shows  that  you  sell  a  business  at  a  higher 
premium  on  account  of  its  locality,  and  these  excessive 
bonuses  paid  are  really  in  the  nature  of  rent  paid  for  a 
permanent  monopoly.  It  is  also  asserted  that  when  Patti 
gives  one  of  her  magnificent  renditions,  her  song  is  ex- 
changeable wealth.  It  would  be  better  to  regard  Patti 
as  an  individual  endowed  by  nature  and  developed  by 
training  to  such  an  extent  that  she  yields  a  superior  ser- 
vice to  mankind,  which  is  regularly  sought  and  duly  paid 
for  as  a  service,  and  not  as  wealth.  The  extra  sum  paid 
for  this  superior  service  is  in  the  nature  of  rent  of  native 
and  acquired  talent  and  qualities. 


DO  ECONOMICS. 

Various  Methods  of  Creating  Wealth. 

Material  wealth  is  generally  produced  (1)  by  spon- 
taneous products  of  nature,  sucli  as  forests,  mineral 
springs,  and  favorable  localities;  (2)  by  digging  products 
from  the  mines;  (3)  by  the  growth  of  vegetable  and  ani- 
mal products  obtained  by  working  in  harmony  with  na- 
ture's forces;  (4)  by  transporting  things  from  place  to 
place;  (5)  by  changing  the  forms  of  things;  and  finally, 
(6)  by  exchanging  them  between  different  owners.  Outside 
of  these  specific  processes  of  obtaining  material  wealth, 
social  organization  and  social  Improvement  are  conditions 
which  enhance  all  c    these  nec:ssary  forms. 

It  is  evident  that  the  process  of  coloring  by  dye-stuffs, 
or  that  of  soap-making,  may  be  good  illustrations  of  the 
chemical  production  of  wealth.  Everything  pertaining 
to  the  making  of  clothes  is  an  illustration  of  the  mechan- 
ical processes  of  production.  It  is  not  difficult  to  see  why 
the  transportation  of  goods  from  place  to  place  increases 
the  value  of  wealth.  As  an  example  of  this,  Mr.  Roscher 
refers  to  the  ice  trade  between  Boston  and  the  West 
Indies.  For  example,  it  costs  $2.25  to  pack  ice  in  the 
ship  at  Boston,  but  when  brought  to  its  destination  in  the 
West  Indies  it  sells  for  $65  a  ton  simply  because  its  want- 
satisfying  power  in  the  West  Indies  is  much  greater  than 
its  want-satisfying  power  at  Boston,  where  its  supply  is 
unlimited.  There  is  then  no  difficulty  in  understanding 
how  it  is  that  the  exchange  of  goods  increases  wealth. 
Suppose  a  collector  owns  a  good  farm  horse  and  a  farmer 
a  good  carriage  horse.  The  farm  horse,  not  being  a  good 
roadster,  is  of  little  value  to  the  collector,  while  the  car- 
riage horse  is  of  little  service  at  the  plow  and  of  little 


ECONOMICS.  69 

value  to  the  farmer  in  any  other  way.  By  an  even  ex- 
change of  horses  each  would  be  benefited  by  the  opera- 
tion. This  disproves  the  old  theory  that  if  two  men  trade 
horses  one  at  least  must  be  beaten  by  the  operation.  This 
principle  has  been  further  illustrated  by  the  example  of 
three  persons,  each  tied  to  a  stake,  without  communica- 
tion: one  having  clothing  and  no  food  or  fire,  another 
having  only  food  without  clothing  or  fire,  the  third  hav- 
ing fire  without  clothing  or  food.  As  it  is,  each  one  will 
perish  for  the  lack  of  the  surplus  goods  which  the  others 
have.  Could  they  get  together  and  exchange  their  surplus 
products,  all  might  live.  This  principle  is  vital  in  set- 
tling the  questions  of  international  exchange,  trade,  and 

tariffs. 

Different  Ways  of  Creating  Value. 

The  amount  of  wealth  an  article  contains  is  termed 
its  value,  which  represents  the  power  an  article  has  to 
exchange  for  other  articles.  There  are  various  ways  of 
creating  this  value,  although  it  arises  largely  from  the 
desirability  of  an  article,  and  can  always  be  traced  to 
its  subjective  condition.  The  value  of  an  article  may  be 
enhanced  frequently  on  account  of  time.  Thus,  to  keep 
apples  from  the  autumn  into  the  winter  will  increase 
their  value,  just  as  keeping  ice  from  winter  to  summer 
will  enhance  its  value.  Also,  the  transporting  of  com- 
modities from  one  place  to  another  will  increase  their 
value.  Thus,  corn  which  is  of  little  value  in  Kansas, 
may  be  of  greater  value  in  Chicago,  still  greater  in  New 
York,  and  greater  in  England,  simply  because  of  transpor- 
tation. But  the  greatest  method  of  developing  value  is  by 
changing  the  form  of  articles.     The  timber  of  the  forest 


70 


ECONOMICS. 


may  be  of  little  value  until  transformed  into  wagons  or 
furniture,  when  its  value  may  be  increased  one  hundred 
fold.  Cotton  in  its  raw  state  has  a  certain  value,  but  when 
changed  into  a  fine  garment  through  various  processes  its 
value  is  greatly  enhanced.  The  best  illustrations  of  the 
various  kinds  of  value  may  be  seen  in  the  transformation 
of  iron  ore  into  various  articles.  Thus,  the  ore  at  the  mouth 
of  the  mine  is  possessed  of  a  certain  value,  but  when  it 
is  transported  to  the  smelter  its  value  increases  because 
of  the  change  of  place.  When  passed  through  the  smelter 
it  is  changed  into  pig-iron,  and  its  value  is  greater  than 
before.  If  the  pig-iron  is  transported  to  steel  works  its 
value  is  increased  again,  and  increased  still  again  when 
transformed  into  steel.  If  the  same  steel  is  developed 
into  a  sewing-machine,  a  bicycle,  or  a  watch  spring,  its 
value  is  enhanced  very  many  times.  The  value  of  manu- 
factured articles  may  be  greatly  increased  by  storage 
until  the  demand  for  them  is  increased. 

We  shall  find,  then,  that  in  the  production  of  wealth 
to  change  the  form  or  place  of  an  article  may  increase  its 
value,  and  that  the  value  is  represented  always  in  the 
power  of  exchange.  It  is  the  relative  term  always  ac- 
companying the  utility  of  an  article  which  represents  its 
want-satisfying  power.  But  this  takes  us  back  again  to 
the  proposition  that  all  persons  engaged  in  these  various 
processes  are  producers,  and  all  those  who  are  aiding 
directly  or  indirectly  the  persons  engaged  in  these  specific 
processes  may  also  be  classified  as  producers. 

Various  Processes  of  Production. 
If  we  inquire,  however,  into  the  essential  elements  of 
production,   and  try  to  estimate  what  factors   are  most 


ECONOMICS.  71 

largely  engaged  in  the  process,  we  shall  find  that  land, 
or  nature,  labor,  capital  and  social  organization  are  the 
great  factors  of  production.  'Not  that  nature  in  itself 
is  a  producer  of  wealth  without  the  process  of  labor  or 
human  exertion,  but  it  occupies  such  an  essential  position 
in  the  process  of  production  that  it  is  considered  a  factor. 
These  are  all  working  in  combination  in  the  creation  of 
wealth.  While  capital  at  first  was  not  a  primary  factor, 
it  has  become  essential  to  modern  economic  processes. 

Essential  Factors  of  Production. 

The  two  essential  factors  of  production  are  land  (or 
nature)  and  labor.  Without  these  there  can  be  no  arti- 
ficial production  of  wealth.  By  land  we  mean  not  only 
the  earth  in  its  fertility  and  wealth  of  vegetable  and 
animal  life,  but  the  water-power,  and  indeed  all  the  per- 
manent forces  of  nature  which  may  be  used  and  turned  to 
man's  service.  It  is  only  by  the  application  of  labor  to 
these  that  wealth  or  economic  goods  are  produced.  In  the 
beginning  labor  takes  the  initiative  by  transforming 
the  products  of  nature  into  useful  articles,  such  as 
bows  and  arrows  and  implements,  or  into  boats,  canoes, 
and  household  utensils.  Again,  it  creates  clothing,  and 
houses, — all  from  the  raw  products  of  nature.  These  pro- 
ductions are  called  wealth,  in  the  creation  of  which  labor 
has  been  the  constant  factor  from  the  beginning. 

Conditions  of  Wealth-Producing. 

If  man  through  labor  has  developed  certain  wealth, 
and  this  again  is  turned  to  aid  in  the  production  of 
other  wealth  or  economic  goods,  such  wealth  set  apart  to 
be  used  in  the  production  of  economic  goods  is  called 
capital.     In  the  modern  economic  life  there  is  no  produc- 


72  ECONOMICS. 

tion  of  any  great  extent  possible  without  capital.  Though 
labor  logically  preceded,  capital  usually  takes  the  initia- 
tive in  production.  The  process  is  as  follows :  first,  labor 
produced  certain  portions  of  wealth ;  then  this  wealth  was 
used  along  with  labor  to  create  other  wealth.  As  wealth 
increased,  capital  became  more  prominent,  and  it  em- 
ployed more  laborers  in  the  obtaining  of  raw  material  and 
in  the  manufacture  of  useful  articles  from  this  raw  ma- 
terial. In  some  enterprises  we  find  a  large  amount  of 
capital  and  a  small  amount  of  labor  necessary  for  produc- 
tion, while  in  others  the  process  is  the  reverse,  and  we 
find  a  large  amount  of  labor  to  a  small  amount  of  capital. 
But  in  every  instance,  before  production  is  entered  upon 
capital  takes  the  initiative.  It  constructs  the  buildings, 
it  furnishes  the  machinery  and  raw  material,  and  gives 
labor  an  opportunity  to  earn  its  own  wages.  Thus  labor 
is  limited  in  its  efforts  by  the  amount  of  capital  in  use. 
The  other  non-essential  condition  of  wealth-producing 
is  social  organization.  It  is  sometimes  said  that  the  state 
is  a  partner  with  the  individual  in  the  process  of  produc- 
tion. This  is  rather  a  strong  and  fanciful  expression,  al- 
though it  must  be  conceded  that  without  social  organiza- 
tion modern  business  enterprises  would  be  futile.  The 
organization  of  society  protects  property  and  guarantees 
the  rights  of  each  individual  to  the  products  of  wealth. 
More  than  this,  when  society  at  large  deepens  a  harbor 
or  widens  a  river,  builds  a  canal  or  railroad,  or  furnishes 
means  for  the  better  development  of  agriculture,  manufac- 
tures, exchange,  trade,  or  commerce  in  any  way,  it  is 
performing  a  great  service  in  the  advancement  of  produc- 
tion.    Therefore  modern  productive  enterprises  are  not 


ECONOMICS.  73 

only  not  possible  without  social  organization,  but  the  effect 
of  social  organization  is  to  advance  them  at  a  rapid  rate. 

Means  of  Increasing  Production. 

One  of  the  best  methods  of  increasing  production  is 
through  superior  business  management,  and  this  has  de- 
veloped a  distinct  class  of  people,  and  indeed  a  distinct 
vocation,  in  production.  It  might  be  well  to  suggest  the 
ordinary  fifth  factor  in  production  as  managing  ability, 
for  indeed  without  this,  modern  business  enterprises  could 
not  be  carried  on.  The  entrepreneur  or  business  manager 
furnishes  the  brain-power  that  keeps  industry  intact.  He 
assumes  the  risk  and  responsibility  of  business,  under- 
takes business  enterprises,  paying  for  capital,  labor  and 
land  as  he  has  need.  But  while  he  has  the  responsibility 
of  loss  he  has  the  right  of  gain.  Outside  of  a  sound  and 
industrious  body  of  laborers,  other  things  being  equal,  no 
other  factor  is  of  greater  importance  than  the  managing 
ability  of  the  business  men  who  undertake  the  great  en- 
terprises of  industrial  life. 

There  are  other  means  of  enhancing  production,  by 
having  a  better  quality  of  labor,  and  better  relations  be- 
tween those  furnishing  the  capital,  the  labor,  or  land, 
and  the  managing  ability.  Harmonious  activity  of  all 
factors  enhances  production.  Also,  it  may  be  stated  that 
certain  things  which  have  arisen  out  of  the  necessity  of 
economic  progress  from  time  to  time  represent  some  of 
the  most  wholesome  conditions  of  production.  Among 
these  are  the  divisions  of  labor  which  enable  men  to  pro- 
duce more  in  the  same  time  with  less  energy:  the  intro- 
duction of  so-called  labor-saving  machinery,  which  com- 
bines with  man's  service  as  the  result  of  his  inventive 


74 


ECONOMICS. 


genius;  and  the  credit  system,  which  enables  the  rapid 
exchange  of  goods,  rapid  transportation  facilities,  the 
fertile  soil  and  excellent  climatic  influences,  all  of  which 
tend  to  modify  and  intensify  the  processes  of  production. 

References:  "Walker,  Political  Economy;  Gun  ton,  Wealth  and 
Progress ;  Roscher,  Political  Economy ;  Marshall,  Economics  of 
Industry, 


ECONOMICS. 


76 


CHAPTEK   11. 
LAND  AS  A  FACTOR  IN  PRODUCTION. 

Land  or  Nature  the  First  Consideration. 

Man  derives  directly  or  indirectly  all  his  sustenance 
from  the  soil  and  from  the  elements  of  nature.  From 
the  soil  he  receives  vegetable  and  animal  products.  From 
the  water  he  receives  power  to  turn  machinery  and  means 
of  transportation.  The  winds  furnish  him  means  of  pro- 
pelling machinery  and  mills,  and  carrying  on  commerce. 
The  forests  yield  him  timber;  the  mines  yield  him  coal, 
salt,  iron,  precious  metals,  and  many  other  products.  The 
sunshine  pours  a  flood  of  light  and  a  volume  of  heat  upon 
the  earth,  and  quickens  everything  with  life.  It  is  from 
nature  that  man  receives  the  conditions  that  allow  life  and 
the  means  which  perpetuate  it.  It  is  through  labor,  in  the 
mastery  of  these  forms,  forces  and  elements  of  nature,  that 
man  supports  life  and  advances  his  material  welfare. 

Bounties  of  Nature. 
Nature  is  everywhere  bountiful  so  long  as  labor  forces 
her  to  yield  her  treasures.  Economic  writers  have  spoken 
of  the  niggardliness  of  nature,  and  how  through  excessive 
toil  only  could  man  receive  his  support.  They  have  pic- 
tured all  of  the  difficulties  of  economic  life  as  appearing 
directly  on  account  of  the  niggardliness  of  nature  in  with- 
holding her  bounties  from  man.  Other  writers  have  tried 
to  show  that  nature  is  bountiful,  and  that  all  wealth 
comes  from  it. 


76 


ECONOMICS. 


The  bountifulness  of  nature  varies  in  many  ways  on 
account  of  different  climate  and  soil.  In  one  territory 
the  soil  is  fertile,  and  with  a  small  amount  of  cultivation 
responds  readily  to  the  labor  of  man;  in  another  place 
"the  soil  is  poor,  and  with  his  utmost  attention  it  yields 
but  a  meager  crop.  In  the  tropical  climates  food  grows 
already  prepared,  while  in  the  colder  climates  the  soil 
must  be  thoroughly  tilled  to  yield  a  crop.  Within  the 
tropics  very  little  clothing  or  shelter  is  needed  for  pro- 
tection, in  the  temperate  climate  substantial  houses  and 
abundant  clothing  are  necessary,  while  in  the  extreme' 
cold  regions  man's  whole  time  is  occupied  in  obtain- 
ing sufficient  animal  food  to  keep  him  alive  and  clothing 
to  preserve  him  from  the  rigors  of  the  climate.  Standing- 
alone,  nature  appears  hard,  cruel  and  niggardly,  but  with 
labor  applied  she  is  made  to  yield  a  rich  store  of  treasure. 
By  labor,  food  is  accumulated  in  abundance,  clothing 
comes  without  stint,  and  houses  and  palaces  arise  for  the 
protection  of  man.  By  labor,  the  refinements  of  art  and 
education  are  made  possible.  It  is  true,  that  at  times 
nature  appears  fickle,  for  drought  may  spoil  the  crops, 
storms  may  devastate  them,  buildings  may  be  destroyed  by 
the  ravages  of  fire  and  wind,  and  men  may  perish  through 
starvation  or  the  fatal  pestilence.  Yet  it  may  be  stated 
that  upon  the  whole,  nature  yields  her  bounties  to  man  in 
proportion  to  well-directed  labor. 

OfiEices  of  Land. 

Land  is  essential,  directly  or  indirectly,  to  all  economic 

processes.     Primarily,  it  is  the  great  factor  in  production. 

It  gives  us  standing-room,  without  which  nothing  can  be 

accomplished ;  for  location,  or  position,  is  essential  to  life. 


ECONOMICS. 


77 


In  a  scientific  way  the  principle  of  location  has  a  vast 
deal  to  do  with  economic  life  and  economic  theory. 
Again,  by  fertility  it  yields  vegetable  products  for  man 
and  beast  for  the  purpose  of  sustaining  life  and  for  use 
in  the  arts  and  industries,  and  finally  from  underneath  the 
surface  it  yields  the  rich  mineral  products,  salt,  iron,  tin, 
copper  and  zinc,  so  much  used  in  the  economic  arts,  and 
gold  and  silver,  desired  for  their  services  as  money  and 
in  the  ornamental  arts.  With  these  three  uses  of  land 
man  spends  the  greater  part  of  his  life  in  making  a  com- 
bination of  forces  or  materials  in  the  creation  of  forms 

of  wealth. 

Civilization  and  the  Land  Question. 

In  the  economy  of  human  existence  the  influence  of  a 
fertile  soil  cannot  be  overestimated.  The  ancient  civiliza- 
tion of  Babylon,  the  arts  and  industries  of  Egypt,  the 
philosophy  and  learning  of  Greece,  depended  upon  a  fertile 
soil.  So  great  has  been  the  influence  of  the  land  question 
among  the  nations  of  the  world  that  if  one  were  to  writs 
the  history  of  land  tenure  he  would  have  formed,  in  gen- 
eral, a  correct  estimate  of  the  primary  cause  of  the  rise 
and  development  of  national  life.  In  our  own  nation  the 
effect  of  a  large  fertile  agricultural  area  is  frequently 
overlooked  by  economic  philosophers.  Our  broad  valleys 
and  our  fertile  soil  brought  immigrants  from  the  Old 
World  to  seek  homes  in  the  new  land ;  our  abundant  min- 
eral resources  found  in  the  heart  of  the  mountains  brought 
miners  from  the  Old  World  to  dig  and  delve  for  treasures 
here  and  develop  a  great  population.  It  is  the  immense 
yield  of  these  agricultural  and  mineral  products  that  sup- 
plies the  millions  who  run  the  factories,  the  looms,  and 
the  shops  of  our  own  country^  and  furnishes  the  surplus  to 


78  ECONOMICS. 

feed  the  nations  of  the  Old  World,  for  which  we  receive 
an  ample  return  in  a  variety  of  imported  products. 

Population  and  Land. 
With  the  growth  of  population  the  supply  of  labor  is 
constantly  increased,  and  it  is  limited  by  the  amount  of 
available  food-supply  or  subsistence.  Fearing  that  the 
growth  of  population  might  gradually  outrun  the  means 
of  subsistence,  an  English  economist  named  Malthus  ad- 
vanced a  theory  of  population  as  follows:  he  held  that 
population  tended  to  increase  in  a  geometrical  progres- 
sion, while  the  food-supply  under  most  favorable  circum- 
stances could  not  be  made  to  increase  more  rapidly  than 
in  arithmetical  progression.  Hence  if  there  was  no  check 
to  the  natural  increase  of  population  there  would  soon  be 
more  people  than  the  land  could  support,  and  thousands 
would  die  of  starvation.  But  there  are  sufficient  checks  in 
the  growth  of  population  to  allay  all  fears  on  the  subject. 
The  first  group  are  called  the  positive  checks,  by  which 
population  is  kept  down  by  means  of  war,  pestilence, 
plagues,  intemperance,  vice,  and  crime.  Thousands  thus 
perish  from  the  face  of  the  earth  every  year.  The  pre- 
ventive checks  are  those  of  character  and  prudence,  by 
means  of  which,  as  population  becomes  denser,  marriages 
are  postponed  and  the  number  of  births  lessened.  Also, 
through  self-control  families  become  smaller  each  succeed- 
ing year,  and  a  check  occurs  on  increasing  density  of  popu- 
lation. The  result  is,  that  population  practically  does  not 
increase  in  a  geometrical  ratio.  Again,  through  modern 
invention  and  skill  land  is  made  to  yield  a  larger  return 
for  the  support  of  life.  Thus,  by  intensive  agriculture  an 
acre  of  land  will  yield  a  larger  support  of  life  than  ever 


ECONOMICS. 


79 


before.  By  the  modern  art  of  cooking  and  preparing  food 
a  quantity  of  food  has  nearly  doubled  its  power  to  sup- 
port life.  So  that  there  has  always  been  land  enough,  and 
so  far  as  we  can  see  for  hundreds  of  years  to  come  there 
will  be  sufficient  land  to  support  the  population.  Some 
of  the  instances  of  the  rapid  increase  of  population  would 
seem,  however,  to  be  a  subject  for  thoughtfulness,  at 
least.  If  population  should  increase  in  the  United  States 
in  the  future  as  it  has  done  in  the  past,  it  is  only  a  matter 
of  time  when  there  will  not  be  sufficient  standing-room 
for  the  people.  If  our  population  continues  to  double 
every  twenty-five  years  as  it  has  done  in  the  past,  in  1925 
we  shall  have  150,000,000  people;  in  1950,  300,000,000; 
in  the  year  2000  we  should  have  1,200,000,000  people; 
and  it  would  not  be  long  before  we  should  have  in  the 
United  States  more  than  the  entire  population  of  the 
globe  at  the  present  time.  But  the  checks  have  already 
set  in,  both  to  immigration  and  to  birth,  and  such  a 
calamity  is  not  likely  to  occur.  Mr.  Marshall  points  out 
that  if  there  are  only  two  people  on  the  face  of  the  earth, 
and  that  if  population  doubles  once  in  fifty  years,  at  the 
expiration  of  3000  years  the  whole  surface  of  the  earth, 
land  and  sea  would  be  covered  with  people  300  deep.  The 
significance  of  these  subjects  is  seen  when  the  relation  of 
land  to  population  is  considered,  for  the  development  of 
wealth  is  changed  to  a  great  extent  by  a  rapid  increase. 
Laws  of  Income  from  Agriculture. 
Industries  are  divided  for  convenience  into  those  of 
increasing  returns,  decreasing  returns,  and  equal  returns. 
By  this  is  meant  in  the  first  instance,  that  if  a  certain 
amount  of  labor  and  capital  yields  a  certain  income,  double 


80  ECONOMICS. 

the  amount  of  capital  will  yield  more  than  double  the  in- 
come ;  and  in  the  second  case,  that  if  a  certain  amount 
of  labor  and  capital  yields  a  certain  income,  double  the 
amount  of  capital  and  labor  will  yield  less  than  double 
the  income.  In  the  third  case,  it  is  assumed  that  income 
will  be  increased  in  proportion  to  the  amount  of  increase 
of  labor  and  capital.  Agriculture  is  generally  considered 
an  industry  of  decreasing  returns.  But  it  is  necessary 
to  consider  specifically  what  is  meant  by  this  assertion. 
Usually  when  this  statement  is  made,  it  is  understood  to 
apply  to  a  limited  portion  of  land.  Thus,  if  a  given  farm 
is  taken  of  a  thousand  acres,  a  certain  number  of  laborers 
with  sufficient  capital  applied  to  work  the  farm  will  give 
a  certain  income.  If  double  the  number  of  laborers  crowd 
into  this  same  area,  with  a  proportional  increase  of  cap- 
ital, and  the  limit  of  production  is  not  reached,  they  may 
greatly  increase  the  product.  Hence,  increased  amounts 
of  labor  and  capital  may  be  continually  applied  to  this 
tract  of  land  with  a  gradual  increase  in  the  returns  or 
product;  but  this  will  be  entirely  disproportionate  to  the 
labor  and  capital  expended.  It  may  be  more  clearly  illus- 
trated in  this  way:  To  plow  the  land  once  it  will  yield 
a  certain  crop;  to  plow  it  a  second  time  will  certainly 
increase  the  crop,  but  will  not  double  the  product.  To 
plow  it  a  third  time  will  probably  increase  the  product 
slightly,  so  that  there  is  not  proportionate  return  to  the 
amount  of  capital  and  labor  invested.  Yet  when  we  con- 
sider agriculture  as  a  whole,  it  will  be  found,  if  a  long 
period  be  considered,  that  it  is  an  industry  of  increasing 
returns.  The  invention  of  new  machinery,  new  methods 
and  appliances,  and  the  increased  utility  of  food,  as  above 


ECONOMICS.  81 

stated,  yield  a  larger  return  in  proportion  to  the  number 
of  persons  engaged  each  succeeding  year.  In  the  consid- 
eration of  this  principle,  all  accidents  of  drought  and  years 
of  agricultural  depression  must  be  excluded  as  abnormal. 
In  the  case  of  manufactures,  however,  whicb  are  gen- 
erally classified  as  industries  of  proportionate  returns,  it 
will  be  found  that  they  also  increase  their  returns  from 
year  to  year  in  proportion  to  the  number  of  persons  en- 
gaged, more  rapidly  than  does  agriculture.  However,  if 
taken  in  a  limited  sense  in  a  particular  field,  owing  to 
competition,  it  will  be  found  that  manufactures  decrease 
in  returns  the  same  as  agriculture  in  a  limited  field. 
Where  special  monopolies  exist,  such  as  railroads,  tele- 
graph lines,  and  water-power,  the  industries  are  usually 
those  of  increasing  returns,  as  they  yield  an  income  in  a 
proportion  greater  than  the  increased  application  of  capi- 
tal and  labor. 

lamited  Returns. 

In  agriculture,  when  a  given  territory  is  considered, 
the  law  should  be  given  as  one  of  limited  returns.  That 
is,  in  the  cultivation  of  a  given  tract  of  land  a  point  is 
soon  reached  at  which  no  additional  application  of  labor 
or  capital  will  cause  the  soil  to  yield  any  increased  prod- 
uct In  many  of  the  industries  outside  of  agriculture 
the  same  principle  of  limited,  returns  is  to  be  observed, 
in  a  lesser  degree.  The  law  of  competition  which  reduces 
the  market  price  to  the  cost  of  production,  limits  what 
may  be  done  and  what  may  not  be  done  to  develop  an 

income. 

Extension  of  Territory. 

The  opening  up  of  new  lands  to  modem  civilization 

presents  the  relation  of  land  to  income  in  its  clearest  light. 


OSi  ECONOMICS. 

When  Columbus  first  landed  in  America  a  few  thousand 
Indians  were  roaming  over  a  vast  territory.  They  felt 
that  there  was  not  sufficient  room  for  them  to  obtain  a 
living,  so  they  fought  with  each  other  for  territory.  To- 
day 75,000,000  of  people  occupy  the  same  territory  within 
the  present  boundary  of  the  United  States,  and  still,  with 
the  exception  of  a  few  congested  districts,  there  is  abun- 
dance of  room.  When  the  barbarians  swept  down  over 
Europe  and  invaded  the  Roman  empire,  it  was  to  find  a 
larger  area  of  land.  Although  few  in  number,  their  mode 
of  living  made  the  country  insufficient  for  their  needs, 
and  made  them  discontented  with  their  lot.  Thus,  rather 
than  seek  different  methods  of  intensive  agriculture  or 
larger  use  of  the  land,  they  simply  sought  new  lands, 
hoping  to  retain  their  old  mode  of  life.  Had  they  changed 
their  civilization  by  introducing  intensive  agriculture,  the 
utility  of  land  would  have  been  so  greatly  increased  as  to 
have  supported  a  larger  population  without  the  necessity 

of  migration. 

Land  Area. 

Within  recent  years  large  amounts  of  fertile  land  have 
been  brought  into  use  in  the  United  States,  which  has 
yielded  a  large  increase  in  the  returns  of  the  quantity  of 
the  products.  As  the  demand  for  every  agricultural  prod- 
uct shows  a  diminishing  scale  of  utility,  and  as  the  value 
of  the  whole  product  is  determined  by  the  marginal  utility 
represented  by  the  last  unsatisfied  want,  it  appears  that 
if  the  scale  of  demand  remains  constant  there  will  be  a 
diminished  value  of  the  total  product;  and  this  means 
that  a  point  will  be  inevitably  reached  where  receipts 
will  fall  below  costs,  even  though  costs  themselves  are 
also  diminishing.    We  have  had  ample  illustration  of  this 


ECONOMICS.  83 

from  Western  farming  in  the  years  from  1889-1897. 
For  the  cost  of  agriculture  has  been  decreasing  all  the 
timCj  while  the  value  of  the  product  has  decreased  more 
rapidly  than  the  cost;  hence  the  price  of  a  commodity  in 
the  market  has  frequently  been  reduced  below  the  cost  of 
production.  Thus  a  relatively  decreasing  number  of  agri- 
culturists have  provided  food  for  themselves,  for  the 
whole  nation  at  large,  as  well  as  for  foreign  markets.  If 
we  refer  to  quantity,  it  appears  that  agriculture  taken  as 
a  whole,  considered  in  the  light  of  modern  industrial 
methods,  through  a  period  of  a  century,  is  yielding  more 
to-day  in  proportion  to  the  capital  expended  upon  it  than 
ever  before.  It  is  estimated  that  in  England  during  the 
last  six  hundred  years  the  product  per  acre  of  staple  crops 
has  increased  ten  fold.  But  this,  strictly  speaking,  must 
refer  to  the  quantity  of  the  product  rather  than  to  its 

value. 

Transportation  and  Agriculture. 

One  of  the  greatest  effects  to  be  considered  in  relation 
to  the  productivity  of  the  soil  in  the  United  States  is  that 
of  transportation.  Cheap  transportation  has  a  tendency 
to  enlarge  the  agricultural  areas  and  bring  distant  fertile 
lands  into  the  market.  For  this  reason  the  people  have 
abandoned  the  farms  of  the  East  and  have  taken  up  lands 
in  the  fertile  valleys  of  the  far  West,  distant  from  the 
markets;  yet  the  fertility  of  the  soil  is  so  great  that  the 
yield  is  sufficient  to  pay  the  transportation  to  market  and 
leave  an  income  greater  than  that  of  the  inferior  lands  of 
the  East,  situated  close  to  the  markets.  Indeed,  the  in- 
fluence of  the  fertile  lands  of  the  Mississippi  valley  has 
caused  the  abandonment  not  only  of  the  poorer  lands  of 


84 


ECONOMICS. 


!N'ew  England,  but  even  those  of  Scotland  and  England 
and  other  regions  of  the  Old  World,  which  have  been  for- 
saken for  the  fertile  lands  of  the  ^N^ew  World.  Everjv^here 
we  shall  observe  the  shifting  of  the  population,  rushing 
toward  new  and  fertile  lands,  or  receding  as  they  are 
deceived  by  the  process.  This  change  has  a  vast  deal  to  do 
with  the  doctrine  of  rent. 

Policy  of  the  United  States. 
IsTations  have  had  different  policies  for  the  disposal  of 
agricultural  lands.  The  United  States  by  its  laws  of  1787 
adopted  a  policy  which  had  hitherto  been  unknown  in  the 
practices  of  nations  in  dealing  with  their  public  domain. 
This  policy  made  it  possible  for  everyone  who  desired,  to 
obtain  a  hundred  and  sixty  acres  of  land  at  a  minimura 
price.  This  was  deemed  the  wisest  and  best  disposition 
of  the  land;  although  it  did  not  always  work  well  in 
practice,  for  the  intention  of  the  law  has  frequently  been 
thwarted  by  individuals,  who,  by  fair  means  or  foul,  have 
grasped  large  tracts  of  land,  increasing  their  holdings  iu 
some  instances  to  territories  equal  to  principalities. 
However,  in  this  connection,  it  may  be  stated  that  from 
1870  to  1880  the  average  size  of  farms  gradually  dimin- 
ished, and  from  1880  to  1890  there  was  only  a  slight  in- 
crease in  the  average.*  On  the  one  hand,  large  farms  were 
being  divided  into  smaller  tracts ;  and  on  the  other,  small 
holdings  were  absorbed  by  the  larger.  Thus,  while  a  large 
number  of  vast  holdings  have  been  created,  outside  of  these 
the  average  size  of  the  farm  is  diminishing.  As  to  the 
advantages  of  large  or  small  holdings,  Mr.  Walker  asserts 
that  variety  of  farms  is  best  for  the  benefit  of  agriculture. 
He  holds  that  it  is  a  good  plan  to  have  some  great  farms 

*  The  average  size  of  farms  has  continued  to  diminish  to  the  present  time,  1906. 


ECONOMICS. 


85 


upon  which  the  most  improved  machinery  shall  be  used 
and  the  most  modern  scientific  processes  of  agriculture 
practiced,  in  order  to  furnish  a  stimulus  to  improved  meth- 
ods. He  further  asserts  that  the  medium-sized  holdings, 
which  give  character  to  our  great  farming  communities 
and  enable  men  of  moderate  means  to  engage  in  the  agricul- 
tural business,  are  beneficial  to  a  great  republic  in  which 
the  people  are  endowed  with  the  right  of  self-government. 
He  further  demonstrates  that  small  holdings  should  be 
available,  so  that  those  who  desire  to  quit  the  ranks  of  the 
wage-earning  class  may  own  a  small  parcel  of  land,  and 
thus  have  their  own  homes  and  carry  on  their  own  business 
independently.  This  variety  of  landholding  corresponds 
to  the  variety  of  life  which  is  necessary  to  the  stability 
and  prosperity  of  a  government  by  the  people. 

Monopoly  in  Land. 
Many  fear  that  the  absorption  of  small  holdings  into 
great  baronial  estates  will  continue  until  a  monopoly  of 
lands  shall  obtain,  and  landlordism  shall  prevail  in  the 
United  States  as  in  the  Old  World.  In  England  and 
Scotland  the  land  to-day  is  owned  by  a  very  few  people, 
owing,  in  part,  to  the  laws  of  primogeniture  and  entail. 
France,  on  the  contrary,  through  the  influence  of  an  an- 
cient law,  insists  that  the  estates  must  be  divided  among 
the  heirs,  and  the  practice  of  very  small  holdings  has  ob- 
tained there.  According  to  the  census  of  1890,  sixty-five 
per  cent,  of  all  the  farms  in  the  United  States  were  owned 
by  the  occupants.*  This  would  show  that  landlordism  or 
the  rental  system  is  gradually  increasing  in  the  United 
States.  However,  the  farms  are  still  small  and  the  tend- 
ency to  subdivision  is  great.     What  the  future  will  brinc^ 

*  Tenant  farming  has  increased  since  1890. 


86  ECONOMICS. 

forth  is  difficult  to  see.  Repeated  periods  of  agricultural 
depression  may  lead  to  the  union  of  agricultural  interests 
and  the  management  of  farming  on  a  large  scale,  after  the 
plan  of  a  great  department  store  or  a  modern  "  trust." 
When  a  person  obtains  a  tract  of  land  which  is  peculiarly 
desirable,  to  a  certain  extent  he  obtains  a  monopoly  over 
that  particular  piece  of  property.  But  so  long  as  there  are 
other  tracts  more  or  less  desirable,  this  monopoly  can 
never  be  perfect;  and  so  long  as  he  must  compete  in  the 
market  for  the  sale  of  agricultural  products,  it  is  impossi- 
ble for  him  to  fix  a  monopoly  price  on  his  goods.  Consid- 
ered as  a  whole,  then,  land  is  not  a  monopoly,  unless  it 
could  all  be  owned  and  managed  by  a  given  individual 
or  combination  of  individuals.  N^evertheless,  owing  to 
the  fact  of  the  difference  in  fertility  of  soil  and  desira- 
bility of  location,  a  monopoly  of  land  arises  in  the  form  of 
rent,  independent,  to  a  certain  extent,  of  the  fact  that  the 
individual  producer  cannot  fix  a  monopoly  price  and 
therefore  obtain  monopoly  profits  from  his  agricultural 
produce. 

Agricultural  Area  in  the  United  States. 
!N'otwithstanding*  the  fact  that^  the  city  population  has 
increased  to  an  enormous  extent,  the  agricultural  area  in 
the  United  States  has  increased  more  rapidly  in  propor- 
tion. In  1790  there  was  about  three  per  cent,  of  the 
total  population  in  cities;  in  1890  there  was  about 
thirty  per  cent.  But  the  area  of  cultivation,  including  irri- 
gated land,  amounted  in  1890  to  about  357,616,755  acres;  * 
while  there  were  left  five  hundred  millions  of  acres  of  des- 
ert and  grazing  lands,  seventy  millions  of  coal  lands,  and 
eighty  millions  of  timber,  and  probably  one  million  square 

*  In  1900  total  area  of  farms  841,201,546  acres,  of  which  414,793,191   acres  were  Im- 
proved. 


ECONOMICS.  87 

miles  of  the  territory  still  unsettled.  The  total  amount 
taken  up  by  farms  was  623,218,619  acres.  The  enormous 
extent  of  agricultural  area  enables  the  country  to  support 
its  agricultural  population,  its  immense  city  population, 
and  to  furnish  a  large  proportion  of  the  breadstuffs  of 
Europe. 

The  aggregate  number  of  families  in  the  United  States 
in  1890  was  12,690,152,  of  which  4,767,179  were  farm 
families;  the  remainder,  of  7,922,973,  were  home  fam- 
ilies. By  home  families  is  meant  those  representing 
habitations  in  cities  and  towns.  Of  these  farm  families, 
3,142,746  owned  their  homes,  and  1,624,443  were 
tenants.  Of  those  persons  owning  their  homes,  2,255,- 
789  were  free  from  incumbrances  and  886,957  had 
more  or  less  incumbrances.  That  is,  the  farm-owning 
population  represented  65.92  per  cent,  of  the  whole, 
renters  or  tenants  34.08  per  cent. ;  and  of  the  total  num- 
ber of  farms  owned,  47.32  per  cent,  were  free  from  in- 
cumbrance and   18.60  had  incumbrances. 

This  is  far  better  than  the  showing  of  the  city  popula- 
tion; for  of  these  32.98  per  cent,  owned  their  homes,  21 
per  cent,  of  them  being  free  from  incumbrances,  and 
11.98  per  cent,  having  incumbrances,  while  67.2  per  cent, 
were  tenants. 

In  Kansas  there  are  57.56  per  cent,  of  farm  families 
in  proportion  to  42.44  of  home  families.  In  Iowa  52.88 
per  cent,  are  farm  families,  with  47.12  per  cent,  of  home 
families.  The  largest  proportion  of  farm  families  in  any 
State  in  the  United  States  is  found  in  IN'orth  Dakota, 
with  73.35  per  cent. ;  South  Dakota,  with  70.52  per  cent. ; 
Oklahoma,  69.33  per  cent.;  Mississippi,  66.80  per  cent; 


88  ECONOMICS. 

and  Texas,  60.49  per  cent.  The  smallest  is  Massacliusetts, 
with  7.21  per  cent,  of  farm  families  and  92.79  per  cent, 
of  home  families.  Mnch  of  the  farming  land  occupied 
to-day  has  not  been  cultivated  to  its  fullest  extent,  but  as 
intensive  agriculture  is  employed  the  productivity  of  the 
soil  will  be  greatly  increased. 

Variety  of  Agricultural  ProductB. 

The  United  States  has  a  wide  variety  of  products,  on 
account  of  its  temperature  and  semi-tropical  territory. 
In  this  wide  extent,  from  the  cereals  of  the  J^orth  to  the 
tropical  products  of  the  South,  we  find  a  great  variety 
of  fruits  and  grains. 

As  demand  for  variety  of  foods  has  increased,  there  has 
been  a  marked  tendency  to  develop  diversity  in  agriculture. 
Instead  of  sections  devoting  themselves  entirely  to  wheat, 
to  corn,  or  to  fruits,  there  is  a  tendency  to  raise  all  of 
these  to  meet  the  irregular  demands  for  products.  I^ever- 
theless,  corn  predominates  in  such  States  as  Nebraska, 
Kansas,  Iowa,  and  Illinois,  while  wheat  predominates  in 
Minnesota,  Wisconsin,  Ohio,  and  the  Dakotas.  In  many 
sections  of  California  where  formerly  wheat  was  almost 
the  only  crop,  now  fruit  predominates,  with  a  variety  of 
other  productions.  The  farmer  is  slowly  learning  that, 
because  of  the  uncertainty  of  climate,  and  the  variation 
in  demand  on  account  of  the  irregular  foreign  production, 
he  should  vary  his  crops,  so  far  as  the  soil  and  climate 
will  permit,  to  insure  a  successful  return  on  part  of  the 
land,  if  not  on  all.  This  has  the  additional  advantage  of 
utilizing  the  varieties  of  soil  that  exist  even  on  the  same 
farm,  while  the  alternation  of  crops  on  the  same  soil 
is  necessary  in  many  instances  to  preserve  the  land  from 


ECONOMICS. 


89 


exhaustion.  In  considering  economic  conditions,  scientific 
agriculture  has  done  much  to  increase  the  productive 
yield  of  land. 

Stock-raising  has  continued  in  general  throughout  the 
United  States.  While  an  enormous  stock  production 
is  still  found  on  the  grazing-lands  of  the  West,  still, 
a  larger  value  of  stock  production  is  found  on  the  smaller 
farms  and  special  stock  farms.  When  each  farmer  Las 
a  few  pigs,  sheep,  cattle,  horses,  and  considerable  poultry, 
for  the  market,  the  returns  in  the  aggregate  are  immense 
from  these  sources.  Stock-raising  has  become  one  of  the 
most  productive  and  certain  occupations  of  the  farm. 

Economic  Effect  of  Machinery. 
The  process  of  farming  has  been  almost  entirely  trans- 
formed by  the  introduction  of  devices  and  machines  for 
the  cultivation  of  the  soil.  The  small  farms  of  the  Atlantic 
seaboard  were  rough,  and  in  the  early  period  full  of  stones, 
sticks,  and  stumps  of  timber.  It  was  necessary  to  con- 
duct farming  by  hand,  or  with  small  tools  or  machines, 
but  the  opening  of  the  wide  expanse  of  prairie  land  of 
the  Mississippi  valley  enabled  farmers  to  introduce  ma- 
chinery for  plowing,  sowing,  and  harvesting,  that  are 
marvels  to  one  not  accustomed  to  their  use.  The  eco- 
nomic effect  is  to  lessen  the  cost  of  production.  That  is, 
one  man  can  now  accomplish  as  much  with  machinery 
as  twenty  men  could  formerly  without.  The  whole  popu- 
lation of  the  United  States,  with  the  old-fashioned  ma- 
chinery, could  not  produce  what  is  now  produced  by  a 
third  of  the  population,  with  modern  machinery.  One 
economic  effect  of  this  introduction  of  machinery  is  that 
a  smaller  population  is  being  used  in  the  production  of 


90  ECONOMICS. 

raw  material  in  proportion  to  that  employed  in  making 
the  finished  product  Hence  a  proportionately  smaller  re- 
turn to  farm  labor  than  to  that  of  manufacturing  labor. 

While  the  decrease  in  the  cost  of  production  is  evi- 
dent, an  enormous  loss  has  been  suffered  on  account  of 
the  rapid  changes  of  machinery.  As  in  manufacturing, 
the  farmer  who  succeeds  must  keep  up  with  the  latest 
improvements  or  the  cost  of  production  will  be  greater 
than  the  price  of  his  product  in  the  market.  Therefore 
the  whole  farming  country  is  strewn  with  out-of-date 
machinery,  which  must  of  necessity  be  a  great  economic 
loss. 

Again,  the  lack  of  economy  of  consumption  has  also 
created  a  great  loss.  The  old-fashioned  farmer  might 
lose  a  spade,  or  a  hoe,  or  a  plow,  by  carelessness  and 
exposure  to  the  weather,  and  the  loss  would  not  be  con- 
siderable. But  sun  and  storm  and  wind  wiU  destroy 
the  modern  complicated  farm  machinery,  which  represents 
an  outlay  of  hundreds  of  dollars,  more  readily  than  it 
would  destroy  the  old-fashioned  instruments.  Therefore 
to  the  farmer  it  is  of  prime  importance  that  he  economize 
the  use  of  his  machinery  if  he  wishes  a  margin  in  farming. 

We  may  almost  say  that  the  agriculturist  is  a  manu- 
facturer of  products,  the  same  as  any  other  manufacturer. 
It  is  true,  he  has  the  land  upon  which  to  labor,  and  so 
does  every  other  producer,  to  a  certain  extent.  He  re- 
ceives his  assistance  from  nature  in  the  fertilitv  of  the 
soil,  though  the  miller  may  receive  his  from  the  water- 
power,  and  the  manufacturer  from  mere  occupation  of 
the  land.  Hence,  successful  farming  lies  more  and  more 
in  understanding  the  nature   and  preservation   of   soils 


ECONOMICS.  91 

and  the  adaptability  of  crops  to  them,  a  study  of  the 
best  machinery,  its  care  and  use,  and  a  careful  study 
of  the  markets,  to  know  what  to  produce  and  when  to 
market  it  at  a  given  price. 

Corporate  Farming. 

Scientific  methods  have  been  used  on  very  many  large 
farms,  and  while  small  farming  has  usually  been  more 
profitable,  because  more  largely  introduced,  it  still  re- 
mains true  that  a  large  farm,  properly  managed,  can  pro- 
duce more  cheaply  than  a  series  of  small  farms.  For  each 
of  the  small  farms  must  have  its  own  set  of  machinery, 
its  buildings,  its  special  management,  etc.  Here,  as 
elsewhere  in  all  industry,  combination,  if  there  is  suffi- 
cient brain-power  exercised  in  organization,  w411  enable 
a  cheaper  production.  Just  as  the  department  store  may 
sell  goods  at  a  lower  rate,  and  make  a  profit,  than  smaller 
stores  in  competition,  or  as  a  trust  or  combine  may  fur- 
nish manufactured  articles  more  cheaply  than  a  number 
of  factories  in  competition,  so  a  large  farm  under  corpo- 
rate management,  where  the  territory  would  permit,  might 
yield  a  larger  return.  But  usually  it  does  not,  because 
of  the  lack  of  care  in  tilling  every  foot  of  the  soil  well 
and  making  it  yield  its  utmost;  while  on  the  other  hand, 
such  care  is  frequently  bestowed  upon  the  small  farms. 

The  chief  question  in  all  of  these  industries  is  economy 
of  consumption;  or,  in  plain  language,  the  lessening  of 
expenses  of  handling  the  larger  amount  of  the  same  grade 
of  goods,  enabling  the  employment  of  large  machinery 
which  lessens  the  cost  of  production,  and  the  advantage 
of  transportation. 


»2»  ECONOMICS. 

Irrigation. 

One  of  the  best  forms  of  intensive  agriculture  in  modern 
or  ancient  times  is  that  of  irrigation.  In  the  valleys 
of  the  Euphrates  and  the  ISTile,  in  India  and  Spain,  this 
method  furnished  in  ancient  times  a  food-supply  for 
many  millions  beyond  the  valleys  in  which  the  crops  were 
raised;  and  especially  in  modern  times  in  the  western 
part  of  the  United  States,  in  the  so-called  arid  region, 
irrigation  has  been  carried  on  with  great  success.  Irriga- 
tion contributes  to  the  density  of  population,  and  there- 
fore develops  a  better  system  of  industrial  cooperation, 
which  yields  a  higher  return  of  economic  product  for 
the  labor  employed. 

Irrigation  will  not  only  allow  the  use  of  lands  that 
could  not  otherwise  be  called  into  service,  but  by  proper 
use  of  lands  of  insufficient  rainfall  they  may  be  made 
to  yield  a  larger  return  for  the  labor  and  capital  ex- 
pended. It  has  been  demonstrated  that  agriculture  is 
an  industry  of  diminishing  returns.  The  whole  trouble 
with  it  as  an  industry  is,  there  is  a  limit  to  the  amount 
which  an  acre  will  yield.  You  may  double  the  capital 
and  double  the  labor,  but  it  is  quite  unusual  to  double 
the  return.  Therefore  the  importance  of  irrigation  is 
to  increase  this  yield  beyond  the  ordinary  return,  with 
comparatively  little  labor.  Thus  it  is  that  farm  lands 
are  made  to  yield  a  larger  return  each  succeeding  year, 
although  it  may  be  a  larger  return  in  quantity  and  not  in 
exchange  value.  It  is  this  intensive  agriculture  which 
prevents  in  a  measure  the  population  from  overtaking 
the  food-supply.  Malthus  demonstrated  that  unless  there 
were  positive  and  preventive  checks   on  the  population 


ECONOMICS. 


93 


which  increases  in  a  geometrical  ratio,  it  would  in  time 
outrun  the  food-supply  which  increases  in  an  arithmet- 
ical ratio.  Among  the  various  phases  of  a  highly  devel- 
oped civilization,  none  is  more  important  than  intensive 
agriculture  as  a  check  to  over-population.  It  enables  one 
acre  to  yield  a  much  larger  food-supply  than  it  otherwise 
would.  It  is  in  line  with  scientific  fertilization,  which 
forces  ^Nature  to  yield  her  bounties  more  freely.  A  cheap 
food-supply  is  beneficial  to  the  human  race  and  to  all 
forms  of  progress.  By  a  cheap  food-supply  is  meant 
the  largest  possible  return  of  the  land  for  the  least  possi- 
ble effort,  so  that  though  the  farmer  may  receive  lower 
prices  for  his  food,  he  is  ultimately  benefitted  by  being 
able  to  purchase  manufactured  articles  at  a  lower  price, 
for  cheaper  goods  make  cheaper  manufactured  articles. 
Suppose  a  man  can  by  an  ordinary  method  raise  two 
bushels  of  wheat  a  day  and  another  man  can  in  the  same 
time  make  a  hat  which  is  exchangeable  for  two  bushels 
of  wheat :  if  by  the  improved  process  of  irrigation  the  man 
is  enabled  to  raise  four  bushels  of  wheat  in  a  day  and 
the  man  can  make  a  hat  in  the  same  time  which  is  ex- 
changeable for  the  four  bushels  of  wheat,  they  are  each 
advanced  in  wealth  by  the  sum  of  two  bushels  and  a  hat. 
Their  amount  of  wealth  is  increased,  their  well-being  has 
been  advanced. 

One  of  the  important  effects  of  a  cheap  food-supply 
iu  the  Old  World  was  dense  population.  Owing  to 
the  clieapness  of  food  the  population  multiplied  rap- 
idly, and  in  the  imperfect  form  of  government  this  cheap 
food  developed  despotism.  A  few  individuals  could  under 
these  circumstances  rule  the  masses.     But  under  enlight- 


94 


ECONOMICS. 


ened  government  there  need  be  no  fear  of  a  race  of  serfs. 
All  densely  populated  districts  are  in  danger  of  tlie  op- 
pression of  bad  government,  althougb  the  possibility  is 
for  the  best  government.  In  a  country  where  the  people 
are  jealous  of  their  liberties  there  can  be  no  danger  ol 
the  development  of  despotism  on  account  of  thickly  pop- 
ulated communities.  Indeed,  the  permanency  of  agricul- 
ture tends  to  develop  permanent  social  and  political  rela- 
tions. And  one  of  the  chief  economic  as  well  as  social 
blessings  is  that  the  yield  shall  be  permanent.  A  f  armei 
practicing  irrigation  knows  about  what  his  income  will 
be  each  year.  That  is,  he  rises  above  the  uncertainty  oi 
drought  and  the  fickleness  of  climate  in  general. 

But  what  will  be  the  Effect  of  Irrigation  on  Prices? 

In  general,  prices  are  regulated  according  to  the  law 
of  supply  and  demand,  or,  more  specifically,  by  the  mar- 
ginal cost  of  productivity;  and  if  a  large  amount  of  agri- 
cultural produce  is  thrown  upon  the  market  it  will  have 
a  tendency  to  lower  prices,  until  through  the  development 
of  other  industries  it  should  be  absorbed.  But  a  small 
amount  of  irrigable  land  in  the  United  States  could 
scarcely  be  the  controlling  element  in  the  establishment 
of  prices.  Should  Kansas  develop  the  arid  lands  of  the 
West,  she  would  be  able  to  throw  agricultural  products 
into  Eastern  markets  and  the  markets  of  the  world  more 
cheaply  than  could  be  done  by  agriculture  in  eastern  Kan- 
sas, Missouri,  or  any  other  territory  where  irrigation  is 
not  resorted  to.  The  products  of  the  irrigable  lands 
would  receive  the  same  price,  regardless  of  the  cost  oi 
production,  as  those  of  other  lands,  where  the  cost  of 
production  is  greater.     The  result  would  be  that  larger 


ECONOMICS.  95 

profits  would  come  to  the  irrigated  land,  or  else  prices 
would  fall.  Should  irrigation  be  carried  on  to  such  an 
extent  that  the  farm  produce  should  be  increased  sufii- 
ciently  to  cause  a  fall  in  prices,  the  poorer  classes  of 
farms  would  go  out  of  use,  while  still  the  irrigated  lands 
would  continue  to  be  cultivated  at  a  profit.  Whichever 
result  might  occur,  the  irrigated  lands  would  profit  at 
the  expense  of  other  territory,  less  favorably  situated. 

A  high  state  of  industrial  organization  can  only  occur 
in  relatively  dense  population,  and  the  rapid  accumulation 
of  wealth  is  dependent  upon  a  highly  organized  com- 
munity. The  separation  of  producers  into  natural  classes 
and  their  subdivision  into  specialized  labor  represent  one 
of  the  most  potent  means  for  the  accumulation  of  wealth. 
A  successful  division  of  labor  can  only  be  had  in  a  rela- 
tively dense  and  well-organized  community.  This  is 
marked  not  only  in  the  utilization  of  labor,  but  also  of 
capital.  Capital  seeks  its  best  use  and  highest  remunera- 
tion in  a  company  of  diversified  industries  and  interests 
represented  in  a  highly  organized  industrial  community. 

General  Results  of  Irrigation. 
Thus  we  shall  find  that  irrigation  may  become  a  means 
of  developing  a  permanent  industrial  life;  of  reducing 
uncertainty  of  agriculture  to  certainty;  of  removing  rest- 
lessness and  discontent.  It  will  furnish  a  means  of  de- 
velopment of  a  higher  industrial  organization,  including 
a  division  of  labor,  which  will  furnish  a  means  of  the 
rapid  accumulation  of  wealth.  It  will  insure  better  edu- 
cational facilities  and  a  higher  educational  standard.  It 
will  develop  better  social  conditions.  It  will  elevate  the 
religious  life  and  develop  the  religious  nature.     It  will 


96 


ECONOMICS. 


furnisli  an  opportunity  for  a  higher  political  development, 
which  shall  be  conducive  to  good  government  and  the  ad- 
ministration of  justice.  Therefore,  with  better  schools 
and  churches,  with  better  means  of  social  enjoyment, 
with  a  more  perfect  and  satisfactory  government,  with 
good  roads  for  rapid  communication,  with  the  use  of  the 
telephone  and  electric  light,  with  a  better  water-supply 
and  a  more  perfect  sanitation,  with  a  daily  mail  carrying 
the  news  to  every  farm-house,  all  of  which  are  dependent 
upon  a  relatively  dense  population,  farm  life  will  be 
made  the  most  attractive  and  wholesome  life  of  the  land. 
And  these  conditions  brought  about  by  irrigation  may  be 
extended  to  the  fertile  districts  receiving  sufficient  natural 
rainfall,  until  we  shall  find  that  farm  life,  so  uncertain  and 
unattractive  in  the  past,  shall  become  the  most  attractive 
of  all  occupations,  on  account  of  its  freedom  and  its 
social  and  political  conditions.  Then  let  us  hope  that 
the  young  man  will  return  from  the  college  to  the  farm 
and  help  his  fellow  in  building  up  the  most  free,  en- 
lightened and  attractive  communities  found  anywhere  in 
this  broad  land.  It  is  dangerous  to  prophesy,  but  I  will 
venture  the  conjecture  that  within  fifty  years  in  the  United 
States  there  will  be  a  change  in  the  attitude  of  young  men 
of  good  ability.  Instead  of  seeking  the  law  and  medicine, 
and  commercial  and  educational  positions,  they  will  return 
to  the  farm,  where  they  will  find  full  scope  for  their 
educated  abilities  in  the  industrial,  social,  economic  and 
political  life  which  it  offers. 

Forests  and  Fisheries. 
As  land  considered  as  a  factor  in  production  includes 
all  of  nature,  we  find  that  one  product  of  America  has 


ECONOMICS. 


97 


been  greatly  neglected.  The  enormous  waste  of  the 
spontaneous  growth  of  forests  in  the  early  agricultural 
history  of  the  nation  reached  the  extent  of  prodigality. 
The  axe  and  the  firebrand  made  way  for  the  crops  of 
corn  and  wheat.  'No  attempt  was  made  to  save  growing 
forests  and  leave  a  source  of  enormous  wealth  to  succeed- 
ing generations.  We  have  no  wise  timber  laws  in  the 
United  States  for  the  protection  and  cultivation  of  forests, 
as  they  have  in  many  of  the  states  of  the  Old  World. 
Some  few  laws  have  been  made  for  encouraging  the  plant- 
ing and  care  of  forests,  but  they  have  had  but  little  in- 
fluence. There  are,  however,  some  public  parks  in  the 
United  States  which  are  termed  Indian  and  military  res- 
ervations, having  the  protective  care  of  the  United  States 
Government,  and  some  care  has  been  taken  to  protect 
some  of  these  parks  from  devastation.  But  the  saw-mill 
has  penetrated  the  great  forests  of  the  West  and  ^N'orth- 
west  and  taken  out  the  best  of  the  timber,  and  destroyed 
that  which  was  young  and  growing.  The  waste  of  forests 
can  scarcely  be  estimated. 

Twenty-five  billion  cubic  feet  of  wood  is  consumed 
annually  in  the  United  States,  which  is  more  than  the 
forests  of  the  United  States  annually  produce.  That  is, 
it  is  equivalent  to  the  wood-growth  of  five  hundred  million 
acres,  which  is  far  in  excess  of  the  forest  acreage  of  the 
United  States.  It  would  be  wise  in  the  Federal  Govern- 
ment to  oversee  the  forests  on  lands  yet  unoccupied,  and 
to  preserve  them.  Foresters  should  be  appointed  to 
market  the  wood  and  care  for  the  growing  timber. 

The  United  States  has  been  more  judicious  in  the  es- 
tablishment of  fisheries  for  increasing  the  fish  food-supply 
-7 


98 


ECONOMICS. 


of  the  United  States.  Nothing  is  more  important  than 
the  stocking  of  our  lakes  and  streams  with  iish  to  make 
up  for  the  loss  entailed  hy  constant  consumption.  Every 
effort  of  the  Government  to  increase  the  universal  supply 
of  food  advances  the  means  of  civilization.  It  improves 
the  economic  conditions  of  the  nation  and  is  of  vast  im- 
portance in  the  shifting  of  economic  conditions. 

Land  Tenure. 

Whether  the  United  States  vrould  have  done  better  to 
adopt  a  different  form  of  land  tenure,  by  which  the  nation 
retained  a  large  domain  of  forest  and  arable  land  which  it 
could  exploit  by  tillage  or  rental  for  the  increase  of  the  pub- 
lic revenue  and  the  prevention  of  too  rapid  increase  of  agri- 
cultural area  and  the  wanton  destruction  of  forests,  is  not 
easy  to  determine.  It  was  customary  for  the  nations  of 
the  Old  World  to  have  such  a  domain.  England,  through 
the  influence  of  economic  writers, — among  whom  was 
Adam  Smith,  who  pointed  out  the  failure  in  the  adminis- 
tration of  these  lands, — gradually  abandoned  the  idea  of 
national  holdings. 

In  the  Roman  system  the  ager  puhlicus  was  a  source 
of  great  contention,  distrust,  and  political  corruption. 
The  Spanish  nation  in  its  colonization  had  a  method  of 
setting  apart  a  portion  of  the  territory  for  the  payment 
of  the  expenses  of  government. 

The  United  States  established  a  policy  of  small  farms 
in  the  beginning.  In  the  colonial  period  there  was  a 
tendency  to  adopt  the  European  system,  which  descended 
from  the  feudal  custom  of  having  large  tracts  with  small 
tenant  farmers.  But  this  system  could  not  survive  under 
the  spirit  of  American  institutions.     As  above  stated,  the 


ECONOMICS.  09 

law  of  1787  which  provided  for  the  survey  of  public 
lands  in  the  E'orthwest  Territory  favored  the  division  of 
the  land  into  small  farms,  allowing  any  person  who  desired 
a  farm  to  purchase  it  at  a  minimum  price  of  the  Govern- 
ment. The  ISTational  Government  has  received  large 
amounts  from  the  sale  of  these  lands  for  the  support  of 
the  public  treasury. 

In  the  case  of  the  admission  of  new  States,  two  town- 
ships of  land  were  devoted  to  the  foundation  of  a  uni- 
versity, and  two  sections  out  of  each  township  for  the 
support  of  the  public  schools.  This,  with  little  variation, 
has  been  the  rule  in  the  case  of  all  States  since  1803, 
when  Ohio  became  a  State.  Again,  in  1861,  two  town- 
ships of  land  were  donated  to  every  State  in  the  Union 
for  the  founding  of  an  agricultural  and  mechanical  col- 
lege. Other  lands  have  been  devoted  to  internal  improve- 
ments. 

The  policy  of  the  United  States  has  been  to  sell  to 
private  individuals  the  great  bulk  of  our  agricultural  land. 
These  lands  are  nearly  all  taken,  and  succeeding  genera- 
tions cannot  hope  to  greatly  extend  the  agricultural  area, 
but  must  be  content  with  intensive  cultivation  of  farming 
lands  already  in  use,  or  must  find  occupation  in  other 
pursuits. 

This  fact  of  the  growth  of  population  and  the  lim- 
itation of  the  extent  of  agricultural  area,  coupled  with 
the  fact  that  the  present  possessors  of  the  soil  are  owners, 
and  therefore  new  generations  have  no  right  or  title  to 
the  land  which  their  fathers  found  and  occupied,  except 
through  inheritance  or  purchase,  have  led  many  enthusiasts 
to  advocate  land  nationalization.     They  base  their  argu- 


100  ECONOMICS. 

ments  -upon  the  theory  of  the  natural  right  of  man  to  an 
equal  share  in  the  soil  which  God  has  given  to  the  whole 
people  and  not  to  any  particular  class.  They  advocate 
land  nationalization,  or  that  all  the  land  be  in  charge  of 
the  Government,  and  that  individuals  should  hold  or  rent 
their  lands  of  this  landlord,  who  represents  the  whole 
people;  that  the  rental  paid  should  go  into  the  treasury 
in  lieu  of  taxes.  While  there  seems  to  be  a  grain  of 
justice  in  such  argument,  the  whole  plan  appears  to  be 
impracticable.  The  United  States,  having  adopted  another 
policy  in  the  disposition  of  our  public  lands,  will  find  it 
no  easy  task  to  reverse  the  plan  by  an  entirely  opposite 
method.  Whether  it  might  have  been  better  to  adopt 
a  plan  of  land  nationalization  in  the  beginning,  is  a 
disputed  point.  It  might  safely  be  said,  however,  that 
the  Government  could  have  been  less  prodigal  with  her 
lands,  developed  the  agricultural  area  less  rapidly,  and 
yielded  a  larger  net  product  of  the  industry  of  the  nation 
in  proportion  to  the  expenditure. 

References:  Walker,  Francis  A.,  Land  and  Its  Rent;  Com- 
mons, J.  R.,The  Distribution  of  Wealth  ;  Ricardo,  David,  The 
Principles  of  Political  Economy  and  Taxation;  United  States 
Census,  1890  and  1900;  Mead,  Ellwood,  Irrigation  Institutes. 


ECONOMICS. 


101 


CHAPTEE  III. 

LABOR  AS  A  FACTOR  IN  PRODUCTION. 

Service  of  Labor. 
It  is  primarily  only  througli  the  power  of  labor  ap- 
plied to  land  or  to  the  forces  of  nature  that  finished 
products  called  wealth,  are  created.  Labor  is  human  ex- 
ertion directed  toward  the  production  of  wealth.  It  may 
be  either  directly  or  indirectly  occupied  in  the  process 
of  production.  Labor  is  either  physical  or  mental;  it  is 
the  "  aggregate  of  those  mental  and  physical  capabilities 
existing  in  the  human  being,  which  he  exercises  when- 
ever he  produces  a  use  value  of  any  description."  The 
person  who  is  creating,  either  directly  or  indirectly,  a 
product  which  is  exchangeable  in  the  market,  or  who  is 
rendering  some  service  to  be  sought  for  and  paid  for,  is 
a  producer  of  wealth  or  economic  goods.  According  to 
Mr.  Eoscher,  labor  is  usually  employed  in  the  occupation 
of  nature's  products,  such  as  the  taking  up  of  natural 
fruits,  fertile  land,  mines  and  forests,  as  well  as  mineral 
springs  and  other  natural  products  of  nature.  Second, 
in  invention  and  discovery.  A  great  part  of  man's  time 
is  spent  in  devising  new  methods  of  operation,  and  con- 
siderable time  is  spent  in  the  discovery  of  new  elements 
of  nature  as  well  as  their  effects  upon  economic  life,  and 
also  in  extending  the  territory  and  increasing  the  number 
of  nature's  products.  Third,  labor  is  employed  in  creating 
raw  materials   by  the  manipulation   of  ;natvu*e's  forces^. 


102  ECONOMICS. 

such  as  the  raising  of  timber,  grain,  wool,  flax,  cotton,  etc. 
Fourth,  by  changing  raw  materials  into  finished  products, 
such  as  the  manufacture  of  machinery  from  the  products 
of  the  mine  and  the  forest.  Fifth,  distributing  things  al- 
ready produced,  giving  them  place  value  by  bringing  them 
near  the  consumer;  and  sixth,  exchanging  wealth  prod- 
ucts, so  as  to  satisfy  wants  and  enhance  the  value  of  arti- 
cles. Seventh,  securing  the  person  of  the  individual,  by 
laws,  government,  and  police  force,  while  he  is  engaged 
in  all  these  processes;  that  is,  the  protection  of  the  state 
and  society.  Eighth,  imparting  instruction,  either  relig- 
ious or  secular.  Ninth,  directing  the  labor  of  others, 
which  is  among  the  most  important  phases  of  economic 
production.  And  finally,  making  laws  for  the  protection 
of  the  people  and  their  general  welfare.  In  these  principal 
occupations  labor  finds  its  service  and  from  them  receives 
its  reward. 

Extent  of  the  Labor  Force. 

The  progress  of  a  community  in  wealth-making,  other 
things  being  equal,  depends  upon  the  extent  of  the  labor 
force.  Up  to  a  certain  point  a  community  is  productive 
according  to  the  extent  of  the  labor  force.  This  labor 
force  will  be  great  as  the  population  is  large,  if  we  con- 
sider a  long  period  of  time.  And  by  this  extent  of  labor 
is  meant  the  number  of  hours  actually  employed  in 
rational  service,  as  well  as  the  quality  of  the  labor.  In 
some  nations  this  labor  force  is  very  great,  according  to 
the  population  as  it  is  marked  by  few  deaths  rather  than 
by  multitude  of  births.  In  another  way  the  restriction  of 
emigration  and  the  encouragement  of  immigration  of  able- 
bodied  p.eraona  will  have  a  tendency  to  increase  the  labor- 


ECONOMICS.  103 

power.  Also,  this  labor  force  is  estimated  in  proportion 
to  the  small  number  of  idle  and  inefficient  persons  in  com- 
parison to  those  who  are  self-supporting  and  able-bodied. 
Again,  it  may  be  further  stated,  that  for  efficien-cy  of 
labor  force  the  number  of  males  should  to  a  certain  extent 
exceed  the  number  of  females.  In  considering  the  number 
of  idle  and  inefficient,  it  will  be  found  that  persons 
between  fifteen  and  seventy  years  of  age  represent 
the  strongest  labor  force.  In  France,  68.06  per  cent,  is 
numbered  between  these  ages.  In  England,  61.02  per 
cent. ;  in  Germany,  62.07  per  cent. ;  while  in  the  United 
States  only  59.06  per  cent,  are  between  the  ages  of  fifteen 
and  seventy, — ^showing  the  efficiency  of  the  labor  force  in 
France  in  proportion  to  the  population  as  compared  with 
the  United  States  and  other  countries.  The  relative 
efficiency  of  nations  may  gradually  change.  It  ap- 
pears also  that  the  number  of  defectives,  dependents  and 
delinquents  of  the  United  States  is  large  in  comparison 
with  France  and  other  countries.  In  the  United  States  496 
out  of  every  100,000  belong  to  this  class,  while  in  France 
405,  Belgium  226,  Sweden  407,  :Norway  532,  Great  Brit- 
ain 452,  Germany  410,  Italy  343,  of  each  100,000,  belong 
to  this  class.  This  is  a  statement  of  our  economic  condi- 
tions, rather  than  a  sociological  defect,  as  in  the  case  of 
the  United  States  the  defectives  are  carefully  enumerated 
and  well  cared  for. 

duality  of  the  Labor  Force. 
While  much  depends  upon  the  extent  and  general  char- 
acter of  the  population  for  effective  labor-power,  the  quality 
of  the  labor  has  much  to  do  with  its  efficiency.     Thus, 
strong,  temperate,  industrious  men  yield  a  larger  return 


104 


ECONOMICS. 


in  the  production  of  wealth  than  weak,  intemperate  and 
shiftless  laborers.  It  is  evident  that  a  class  of  laborers 
enervated  by  living  in  a  warm  climate  will  not  do  as 
much  work  as  those  of  a  temperate  climate,  on  account  of 
the  languor  which  possesses  them.  The  spirit  of  the  laborer 
is  also  to  be  considered :  a  well-kept,  well-fed,  independent, 
and  happy,  or  at  least  contented  laborer,  is  of  far  greater 
economic  value  than  a  poorly  fed,  poorly  clad,  discontented 
individual.  Good  wholesome  food  and  a  sufficient  amount 
of  it  are  conditions  necessary  to  the  best  quality  of  labor. 
Also,  the  native  strength  of  laborers  has  much  to  do  with 
their  efficiency  in  production.  The  character  and  quality 
of  work  done  depend  upon  the  spirit  and  will-power  of 
the  laborers,  and  these,  in  turn,  depend  largely  upon  the 
moral  and  intellectual  characteristics.  While  labor  is 
divided  into  intellectual  and  physical,  even  physical  labor 
must  have  intelligent  direction ;  therefore  the  intelligence 
of  the  laborer  has  much  to  do  with  his  efficiency.  There- 
fore, for  the  best  service  of  labor,  it  is  eminently  proper 
that  supervision  should  be  had  over  sanitary  conditions, 
the  homes,  the  kind  of  food  employed,  and  social  condition 
of  the  laborers,  in  order  that  their  highest  service  may 
be  obtained. 

Various  Grades  of  Labor. 

The  lowest  grade  of  labor  that  is  employed  is  slave 
labor,  for  the  slave  has  no  interest  in  the  amount  or 
quality  of  the  work  done.  He  has  no  interest  in  the  fin- 
ished product  and  no  interest  in  the  care  of  tools  or  prop- 
erty ;  having  no  political  or  social  status,  he  does  not  work 
with  hopeful  energy.  In  the  ordinary  wage  system  a 
higher  grade  of  skill  is  possible  than  in  slave  labor,  be- 


ECOITOMICS. 


105 


cause  the  individual  has  political  and  civil  rights  guaran- 
teed to  him.  He  is  his  own  master,  and  able  to  m.ake  his 
own  contract.  His  pay,  instead  of  being  determined  by 
the  lowest  animal  wants,  is  determined  by  the  kind  and 
character  of  the  work  done.  IsTevertheless,  in  modern 
times  we  do  not  find  him  a  contented  and  hopeful  laborer, 
on  account  of  the  uncertainty  of  employment.  And  it  is 
somewhat  to  his  discredit  that  he  has  less  interest  in  the 
quantity  and  quality  of  the  work  done  and  the  care  of 
materials  and  tools  than  he  ought  to  have.  While  in  one 
sense  his  interests  are  identical  with  those  of  his  em- 
ployer, he  has  not  always  worked  in  his  employer's  in- 
terest. 

The  piece  wages  system  or  the  piece  price  plan  is  in 
some  respects  of  a  higher  order  than  the  wage  system, 
for  in  this  case  the  pay  is  determined  by  the  actual  amount 
accomplished  and  the  individual  receives  greater  encour- 
agement while  the  work  lasts;  having  an  interest  in  the 
amount  done,  he  puts  forth  all  of  his  energies,  which  un- 
fortunately frequently  sacrifices  quality  and  character  of 
service. 

Men  who  are  employed  in  profit-sharing  or  in  co- 
operation have  the  highest  ideal  system  of  labor.  While 
they  have  the  privileges  of  the  highest  grade  of  wage- 
earners  they  also  have  a  direct  interest  in  the  care  of  tools 
and  material,  and  in  the  amount  and  quality  of  service 
rendered.  They  have  also  an  interest  in  the  surplus  earn- 
ings of  capital  and  labor  over  and  above  actual  wages  paid. 
This  gives  them  a  hopeful  and  cheerful  disposition.  Wher- 
ever cooperation  can  be  successfully  carried  on,  it  has 
a  tendency  to  enhance  the  efficiency  of  tne  labor-power 


106 


ECONOMICS. 


and  to  raise  the  standard  of  life,  thus  creating  better  social 
conditions.  But  it  seems  scarcely  possible  that  this  can  be 
entered  into  under  all  circumstances. 

Division  of  Labor. 
The  quantity  of  wealth  produced  is  greatly  increased 
by  the  division  of  labor.  This  increases  its  utility  in  every 
way,  although  not  without  certain  economic  defects.  By 
the  division  of  labor  is  meant,  that  each  individual,  instead 
of  attempting  to  obtain  directly  or  create  all  of  the  goods 
which  he  needs  for  consumption,  performs  a  small  part 
of  the  creation  of  a  single  article  and  exchanges  this 
service  for  the  supply  of  all  his  other  wants.  By  this 
method  the  time  of  apprenticeship  is  greatly  shortened, 
and  the  laborer  soon  develops  extraordinary  dexterity  or 
skill  in  performing  a  single  service.  There  is  also  a 
great  saving  of  time,  for  each  individual  is  kept  in  a 
single  place  and  in  a  single  service;  for  the  same  reason, 
it  is  a  saving  of  mental  and  physical  strength.  Division 
of  labor  also  furnishes  an  opportunity  for  the  distribu- 
tion of  abilities;  as  men  are  endowed  with  different 
characteristics  and  capacities  which  fit  them  for  dif- 
ferent occupations,  so  the  division  of  labor  makes  it 
possible  to  fit  each  one  to  his  proper  place.  Each  one 
seeking  to  perform  a  single  service  in  the  easiest  possible 
manner  has  facilitated  invention.  It  prevents  waste  and 
saves  interest  and  insurance  by  direct  service.  It  is  the 
concentration  of  the  attention  of  the  laborer  on  a  single 
process  that  enables  him  to  devise  methods  of  saving  labor. 
The  improvements  in  the  steam  engine,  in  taking  the  seeds 
out  of  cotton,  in  the  equipment  of  shoe  factories,  cotton 
mills,  and  iron  and  machine  shops,  have  come  about  in 


ECONOMICS.  107 

this  way.  The  machine  grows  from  a  simple,  clumsy 
device,  to  a  complex,  perfectly  acting  instrument,  by  the 
perfection  of  a  single  part  at  a  time.  Division  of  labor 
allows  women  and  children  and  "half-men''  to  work,  thus 
enabling  them  to  contribute  to  their  own  support,  economiz- 
ing the  labor  force  of  a  community. 

But  it  is  not  without  its  evil  effects,  for  in  forcing  the 
mind  to  perform  only  one  service  it  has  a  tendency  to 
make  the  laborer  narrow,  to  decrease  his  general  intelli- 
gence, and  to  render  him  unacquainted  with  the  relation 
of  things.  It  also  tends  to  a  closer  competition  of  labor, 
and  for  a  time  hinders  the  mobility  of  occupation;  but 
this  is  gradually  being  broken  down,  because  of  the  ex- 
cessive division  of  labor  and  the  use  of  machinery  which 
renders  it  possible  for  a  laborer  to  learn  in  a  few  days 
or  a  few  weeks  the  processes  of  a  single  occupation.  The 
chief  danger  of  the  excessive  division  of  labor  has  been  in 
the  excessive  inducements  offered  to  children  to  work  long 
before  they  are  ready  for  the  ordeal.  This  has  been  pre- 
vented to  a  certain  extent  in  modern  times  by  restrictive 

laws. 

Cooperation  of  Labor. 

All  laborers  appear  to  be  competing  with  one  another 
in  general,  and  especially  within  the  different  groups.  The 
rate  of  wages  is  determined  to  a  certain  extent  by  the 
number  of  laborers  demanding  employment  in  comparison 
to  the  number  sought,  or,  in  other  words,  upon  the  law  of 
supply  and  demand.  Hence,  when  a  vacancy  occurs  where 
ten  laborers  are  needed,  a  hundred  immediately  appear, 
seeking  the  position.  Yet  in  the  creation  of  wealth  all 
laborers  are  working  unconsciously  together  in  making 


108 


ECONOMICS. 


goods  more  abundant,  and  consequently  cheaper,  and 
the  means  of  life  more  satisfactory.  Yet  laborers, 
observing  the  competition  in  the  market,  have  sought  to 
cooperate  with  one  another  in  obtaining  a  higher  rate  of 
wages  and  in  the  satisfaction  of  social  and  economic  needs. 
In  doing  this  they  have  rendered  one  another  great  service 
in  keeping  up  the  standard  of  life,  and,  by  agitation  and 
education,  advancing  the  rate  of  wages. 

Increased  Productivity  of  Labor. 
Labor  has  thus  continually  increased  its  productivity. 
Introduction  of  the  machine  and  modern  processes  of  pro- 
duction have  enhanced  the  power  of  labor  to  create  eco- 
nomic goods.  By  the  aid  of  machinery,  labor  can  accom- 
plish more  now  in  an  hour  than  formerly  in  a  lifetime. 
It  is  true  that  this  is  dependent  somewhat  upon  the  aid  of 
capital;  but  in  some  industries  labor  does  the  greater 
part  of  the  work,  while  in  others  capital  performs  the 
greater  service  and  labor  does  but  little.  One  of  the 
complaints  of  labor  in  modern  times  is,  that  it  has  not 
received  a  fair  share  of  tlie  product  of  industry  caused 
by  the  increased  production  consequent  upon  the  use  of 
machinery,  the  skill  of  labor,  and  a  higher  standard  of  life. 

Improved  Condition  of  Labor. 
It  will  be  found,  however,  that  the  laborer's  wages  have 
increased  gradually  from  decade  to  decade;  and  this  is 
evident  from  the  improved  condition  of  labor.  The  homes 
are  better ;  the  improved  intellectual  and  moral  conditions 
of  labor  are  evident  everywhere.  Better  food,  better  cloth- 
ing, and  better  home  comforts,  represent  the  improvement 
of  labor  during  the  past  fifty  years.     It  must  be  remem- 


ECONOMICS.  109 

bered  in  considering  these  questions,  that  periods  of  de- 
pression in  which  thousands  of  laborers  are  thrown  out 
of  employment  must  be  considered  as  abnormal  conditions, 
and  in  the  economic  sense  the  average  improvement  of  the 
laborer  must  be  taken  as  the  basis  of  measurement  of  his 

welfare. 

Labor  Organization. 

To  a  large  extent  this  has  been  due  to  the  exertions  of 
the  laborer  himself.  Improve  the  condition  of  a  laborer 
and  he  will  command  a  higher  rate  of  wages ;  pay  him  a 
higher  rate  of  wages  and  he  will  have  the  means  of  im- 
proving himself.  Thus  is  perpetuated  a  favorable  condi- 
tion of  labor.  But  it  is  through  labor  organizations  that 
more  has  been  done  to  educate  the  people  to  consider  favor- 
ably the  demand  for  better  wages.  Possibly  wages  have 
been  advanced  through  strikes  and  close  organization ;  but 
chiefly  through  the  development  of  temperance,  the  im- 
provement of  the  general  social  condition,  the  increased 
intelligence  of  the  laborer,  making  him  a  better  laborer, 
improvement  in  wages  has  taken  place.  Labor  organiza- 
tions have  sought  to  create  a  monopoly  of  labor  to  compete 
with  a  monopoly  of  capital.  They  have  tried  to  shut  out 
of  a  given  field  all  laborers  not  belonging  to  their  organiza- 
tion. Yet  labor  organizations  have  not  been  without  their 
own  defects,  as  they  have  failed  to  develop  a  broad  and 
catholic  spirit  among  laborers,  and  in  spite  of  their  educa- 
tion have  failed  to  realize  the  best  results  of  broad  citizen- 
ship and  intelligent  humanity.  They  have  developed  a 
selfishness  which  has  in  many  respects  been  detrimental 
to  their  best  interests. 


110 


ECONOMICS. 


Protection  of  Labor. 

The  world  is  slowly  learning  that  the  labor  force  of 
a  community  is  its  best  wealth,  and  that  it  needs  protec- 
tion. Those  employers  who  look  carefully  to  the  interests 
of  their  laborers  receive  a  large  reward  for  their  services. 
Laborers  are  receiving  protection  in  very  many  ways.  The 
laws  guarantee  them  the  right  now  to  organize,  to  assemble 
peaceably,  and  to  strike  when  their  interests  seem  to  de- 
mand. There  was  a  time  when  these  privileges  were  not 
permitted.  Again,  they  are  protected  by  law  from  injury 
by  machinery,  and  foul  air,  and  are  secured  in  their  rights 
to  a  share  of  the  finished  product  as  wages;  in  fact,  are 
protected  in  all  of  their  rights  and  privileges. 

Labor  Laws. 

A  careful  glance  at  the  numerous  labor  laws  which  have 
been  enacted  in  our  leading  States,  especially  in  Massa- 
chusetts, which  provide  for  sanitary  conditions  of  build- 
ings, for  the  protection  of  life  and  limb,  for  the  guarantee 
of  the  wages  of  the  laborer  as  a  first  lien  on  the  product, 
for  the  security  of  the  rights  of  contract,  and  many  other 
matters,  show  conclusively  how  well  laborers  are  protected 
by  law.  Gradually  each  year  we  find  everywhere  measures 
enacted  for  the  protection  of  the  laborer  in  mines  and  fac- 
tories. The  establishment  of  labor  commissions  in  over 
thirty  States  of  the  Union  for  the  purpose  of  gathering  sta- 
tistics and  information  concerning  the  condition  of  labor^ 
has  had  a  vast  deal  to  do  with  the  amelioration  of  the  condi- 
tion of  labor  and  the  protection  of  the  laborer.  Through 
these  statistics  and  the  united  efforts  of  laborers  many  laws 
have  been  enacted  in  their  favor.  Here  as  elsewhere,  in  all 
remedial  legislation,  grievous  errors  have  been  committed, 


ECONOMICS.  Ill 

whicli  can  only  be  remedied  by  time  and  increased  intelli- 
gence on  the  part  of  the  laborers  who  make  the  demands 
and  on  the  part  of  legislators  and  philanthropists  who 
endeavor  to  advance  their  cause. 

Eight-Hour  Law  and  its  Effect  on  Production. 

Strenuous  efforts  have  been  made  by  labor  organizations 
to  raise  the  rate  of  wages  and  to  reduce  the  number  of 
hours  of  labor.  It  may  be  stated  as  a  fact,  that  the  general 
well-being  of  society  would  be  promoted  if  each  individual 
would  labor  eight  hours  a  day,  provided  that  this  labor 
could  be  faithful  and  continuous  and  that  the  remaining 
portion  of  time  not  used  in  sleeping  and  eating  should  be 
devoted  to  self-improvement  and  wholesome  recreation. 
The  rapidity  of  the  production  of  wealth  in  the  world  has 
not  always  conduced  to  the  highest  well-being  of  society,  on 
account  of  the  sudden  changes  that  occur  in  economic  life. 
While  a  large  number  of  people  labor  at  excessive  hours, 
others  are  falling  short  of  this  average  to  a  considerable 
extent,  but  it  is  the  service  of  labor  rather  than  its  amount 
that  yields  general  social  well-being. 

The  economic  effect  of  suddenly  changing  from  ten  to 
eight  hours  would  be  diverse  in  different  industries.  In 
some  instances,  where  the  labor  is  severe,  more  would  be 
accomplished  in  eight  hours  than  in  ten;  while,  on  the 
other  hand,  where  time  and  the  use  of  machinery .  are 
chief  elements,  less  would  be  accomplished  in  eight  hours 
than  in  ten.  Taking  an  average  of  industries,  it  will  be 
found  that  less  will  be  accomplished  in  a  day  of  eight  hours 
than  in  one  of  ten ;  while  considered  by  the  hour,  more  will 
be  performed  in  a  given  hour  in  an  eight-hour  day  than 
in  a  ten.     In  considering  the  change  from  a  ten-  to  an 


112 


ECONOMICS. 


eight-hour  day,  people  seldom  consider  the  effect  on  general 
production.  If  the  same  could  be  accomplished  in  eight 
hours  as  in  ten,  the  question  arises  as  to  whether  there 
would  be  an  increased  employment  of  the  number  of  men ; 
if  the  demands  of  production  can  be  accomplished  in  eight 
hours  as  well  as  in  ten,  the  shortening  of  the  day  would 
not,  as  the  unionists  hope,  give  room  for  an  increased 
number  of  laborers.  On  the  other  hand,  if  less  can  be 
accomplished  in  eight  hours  than  in  ten,  will  not  wages 
necessarily  fall  by  the  day  though  they  may  rise  by  the 
hour?  The  question  involves  many  economic  considera- 
tions, for  it  must  consider  the  amount  of  capital  seeking 
employment,  and  the  increase  or  decrease  of  the  number 
of  laborers  seeking  employment,  and  the  effect  on  wages; 
it  must  consider  the  amount  of  increase  or  diminution  of 
the  total  product  of  industry,  and  the  increase  or  decrease 
of  the  amount  of  land  used  in  obtaining  the  product  and 
the  rent  of  the  same;  and  finally,  it  must  include  the 
increase  or  decrease  of  the  rate  of  profits  which  accrue  to 
the  managers  of  the  business.  It  will  be  seen  that  the 
real  economic  effect  is  determined  by  its  relation  to  all 
productive  and  distributive  industries.  Whereas  a  general 
benefit  would  be  derived  if  such  a  change  would  take  place, 
it  is  difficult  for  the  laborer  to  realize  such  a  benefit  in  the 
form  of  increased  remuneration  for  his  services.  If  such 
a  change  takes  place  it  should  occur  gradually,  so  that 
different  industries  could  be  adjusted  to  meet  the  new 

conditions. 

Restriction  of  Immigration. 

The  great  attempt  of  labor  unions  to  limit  the  number 
of  laborers  entering  a  given  field  and  thus  create  a  monop- 
oly of  labor,  has  been  a  cause  frequently  urged  for  the 


ECOi^roMics.  113 

restriction  of  immigration.  As  wages  would  depend  upon 
the  number  of  laborers  seeking  employment  in  comparison 
with  the  demand,  if  laborers  should  be  kept  out  of  a  nation 
by  means  of  a  well-regulated  law  it  certainly  would  have 
a  tendency  to  raise  wages.  Efforts  have  been  made  on  the 
part  of  the  United  States  to  keep  out  the  low-grade  labor 
of  China,  and,  more  recently,  other  countries  of  Europe. 
It  appears  that  if  labor  is  to  be  protected  in  our  own  nation 
and  a  higher  standard  of  living  is  to  be  preserved  here 
than  that  which  obtains  in  the  Old  World,  it  is  necessary 
to  establish  some  restriction  of  this  kind.  One  of  the 
arguments  for  keeping  up  this  standard  of  life  and  raising 
the  wages  of  laborers,  used  by  certain  politicians,  is  to 
institute  a  high  protective  tariff  which  will  develop  the 
industries  of  the  country,  make  a  demand  for  labor,  and 
thus  increase  wages.  It  is  difficult  to  see  how  this  can  be 
effective  except  in  a  very  general  way.  The  question  will 
be  further  discussed  under  Taxation. 

References:  Walker,  Francis  A.,  Wages  ;  Ely,  R.  T.,  The  Labor 
Movement  in  America;  Howells,  Conflicts  of  Labor  and  Capital; 
Mallock,  Labor  and  Popular  Welfare ;  Walker,  Francis  A.,  Political 
Economy ;  J.  F.  Stimson,  Handbook  of  the  Labor  Law  of  the  United 
States. 


114  ECONOMICS. 


CHAPTEE  IV. 
CAPITAL  AS  A  FACTOR  IN  PRODUCTION. 

Nature  of  Capital. 

While  labor  took  the  initiative  in  the  process  of  produc- 
tion, capital  is  absolutely  necessary  in  nearly  all  forms  of 
modern  production.  Having  its  origin  first  in  labor,  it 
finally  in  turn  supports  labor  in  the  process  of  pro- 
duction, and  may  even  limit  the  amount  of  labor  that 
may  be  employed  in  a  given  territory.  In  the  building 
up  of  industries,  labor  logically  preceded  capital;  but  in 
the  practice  of  modern  production,  capital  takes  the  initia- 
tive. Thus,  labor  first  produced  wealth,  and  the  part  of 
wealth  set  aside  for  the  purpose  of  creating  more  wealth 
was  called  capital.  All  wealth  which  is  not  used  directly 
in  consumption  as  such,  without  regard  to  the  creation  of 
other  wealth,  may  be  called  capital.  Capital  is  the  wealth 
set  aside  with  the  determination  of  use  in  the  process  of 
production.  But  capital  itself  is  consumed  more  or  less 
rapidly,  for  in  every  process  of  production,  although  it  is 
consumed  it  reproduces  itself.  The  whole  body  of  capital 
is  consumed  rapidly,  and  reproduces  itself  rapidly ;  so  that 
the  existing  capital  of  the  world  is  of  very  recent  origin. 
Capital  is  said  to  be  material,  or  immaterial ;  some  persons 
classifying  as  immaterial  capital,  good-will  in  business, 
credit,  superior  skill,  etc.  But  these  could  nearly  all  be 
referred  to  some  other  category  rather  than  to  capital.    Al- 


ECONOMICS.  115 

though  this  is  a  question  of  dispute,  it  is  better  to  classify 
all  capital  as  material,  and  objective. 

The  forms  of  material  capital  are  generally  included^ 
in — first,  materials  to  work  up,  tools  to  work  with;  and   I 
subsistence,  as  given  by  Mr.  Walker.     A  more  analytic    I      N 
classification  gives  the  forms  of  material  capital  as  follows :     ^  V 
Improvements  upon  land,  as  well  as  all  buildings,  streets,      (  j*^ 
and  roads;  tools,  instruments,  and  machines;  useful  do- 
mestic animals ;  materials  for  manufacture  which  reappear 
visibly  in  the  product;  food  and  clothing  for  the  support 
of  laborers ;  materials  for  manufacture  which  will  not  re- 
appear in  the  product;  stocks  of  goods  for  sale;  money; 
means  of  transportation;  and  weapons  for  defense. 

Non-Capital  Wealth. 
It  will  be  seen  from  this  that  the  wealth  used  otherwise 
than  in  the  form  of  capital  is  comparatively  small.  But 
thefundament_alidea  in  capital  is,  that  it  shall  eithe£_yiaLd 
a  revenue,  produce^  more  wealthy  or  provide  for  a  future 
income  and  future  enjoyment.  The  whole  tendency  sfiiems 
to  be  to  make  jnapjtal  that  form  of  wealth  which  is  &et^ 


aside  for  the  satisfaction  of  future  needs;   while  non- 


capital weaTthis  that  which  is  used  for  immediate  consump- 
tion, without  regard  to  future  use.  Considered  in  general, 
this  is  the  essential  definition  of  capital.  However, 
wealth  may  be  lying  idle  in  the  bank,  with  the  intended 
use  of  production,  which  would  be  classified  as  capital. 

Saving  and  Abstinence. 
Writers  have  frequently  asserted  that  capital  arises  from 
saving  and  abstinence,  and,  whether  intentionally  so  or 
not,  have  conveyed  the  idea  that  capital  arises  out  of  saeri- 


116 


ECONOMICS. 


fice  or  parsimony.  But  the  real  trutli  is,  that  capital  is  the 
surplus  over  and  above  the  amount  consumed,  which  is 
again  turned  into  business  in  wealth  production.  The 
word  "saving''  is  all  right  if  properly  understood.  It  is 
simply  refraining  from  the  use  of  wealth  in  one 
way,  that  it  may  be  used  in  another.  It  is  the 
intention  always  to  use  capital,  but  not  to  consume  it 
without  leaving  its  equivalent  plus  a  marginal  return  in 
some  form  of  wealth.  There  may  be  present  self-denial 
for  the  sake  of  a  larger  future  enjoyment,  or  the  refusal 
to  use  wealth  in  one  way  that  it  may  yield  a  larger 
amount  of  rational  enjoyment  in  some  other  way.  At  any 
rate,  economy  of  consumption  has  a  tendency  to  enlarge 
the  amount  of  capital. 

Fixed  Capital  and  Circulating  Capital. 
It  has  been  convenient  to  classify  the  different  forms  of 
capital  in  regard  to  methods  of  consumption  into  fixed  and 
circulating.  The  former  includes  all  concrete  forms  of 
capital  which  are  more  or  less  permanently  established. 
Circulating  capital  is  that  which  is  used  in  a  single  process 
of  consumption,  like  coal,  or  raw  material  of  any  kind 
passing  into  the  finished  product.  It  must  be  understood 
that  all  concrete  capital  is  consumed  in  the  process  of 
production,  and  that  this  classification  is  merely  relative 
in  regard  to  the  time  used  in  consumption.  It  is  desirable 
that  circulating  capital  should  be  consumed  rapidly,  in 
well-ordered  production,  and  that  fixed  capital  should  last 
as  long  as  possible.  Thus,  in  the  consumption  of  coal, 
wood,  or  any  raw  material,  it  is  desirable  that  it  should 
be  consumed  rapidly  because  this  indicates  rapid  produc- 
tion;   while    it    is    desirable    that    machinery,  buildings. 


ECONOMICS.  117 

railroads,  and  all  forms  of  fixed  capital  should  last  as 
long  as  possible. 

Specialized  and  Free  Capital. 
Capital  is  again  classified  in  reference  to  investment, 
into  specialized  and  free.  It  is  said  to  be  specialized  when 
it  is  bound  up  in  a  given  business  from  which  it  cannot 
be  withdrawn  without  loss.  Thus,  if  a  man  should  have 
$10,000  invested  in  a  stock  of  boots  and  shoes,  it  would  be 
impossible  for  him  to  withdraw  this  capital  instantly  and 
invest  it  in  grain  or  flour  without  loss.  He  must  wait 
the  slow  process  of  trade  or  sale.  On  the  other  hand, 
free  capital  is  usually  in  the  form  of  money  or  securities 
which  are  immediately  transferable  and  are  awaiting  in- 
vestment. It  takes  a  large  amount  of  free  capital  to  run 
any  established  business.  And  the  amount  of  business 
which  may  be  carried  on  is  to  a  certain  extent  limited  by 
the  amount  of  available  free  capital.  All  new  business 
must  be  developed  through  the  use  of  available  or  free 
capital,  upon  whose  service  the  business  prosperity  of  the 
community  is  largely  dependent.  Unless  it  be  plentiful, 
new  business  cannot  be  established;  and  unless  there  be 
sufficient  to  run  the  old  business,  it  will  fail.  Business 
communities  have  frequently  suffered  on  account  of  the 
absorption  of  all  free  capital  in  given  industries  and  a 
deficiency  of  the  supply  to  carry  on  business.  When  large 
amounts  of  property  pass  into  the  form  of  fixed  capital 
which  fails  to  yield  a  return  upon  the  investment,  or  when 
large  amounts  of  capital  are  specialized  in  the  form  of 
stocks  of  goods  or  materials  for  which  there  is  no  immediate 
demand,  business  is  in  a  bad  condition,  and  there  is  danger 
of  a  commercial  crisis,  or  trade  depression. 


118 


ECONOMICS. 


Pure  and  Concrete  Capital. 
When  the  term  capital  is  used,  it  generally  has  refer- 
ence to  what  is  known  as  pure  capital,  and  not  to  the  con- 
crete forms.  For  example,  a  merchant,  when  he  talks  of 
his  capital,  generally,  estimates  it  as  so  many  dollars,  with- 
out reference  to  the  concrete  forms  of  his  capital  stock. 
A  large  proportion  of  his  capital  may  be  in  the  form  of 
goods,  such  as  bolts  of  calico  and  other  forms  of  merchan- 
dise; but  these  may  change  from  time  to  time,  the  same 
articles  not  remaining  in  the  store  but  being  sold  and  re- 
plenished by  others, — ^yet  the  capital  may  remain  the 
same.  In  this  rapid  manner  pure  capital  is  said  to  trans- 
migrate from  one  form  to  another.  The  largest  proportion 
of  capital  is  found  in  the  concrete  forms  of  economic  goods 
or  wealth,  and  the  estimation  of  the  value  of  these  in  terms 
of  money  represents  the  pure  value. 

Accumulation  of  Capital. 

It  is  generally  supposed  that  large  masses  of  capital  are 
handed  down  from  generation  to  generation  with  no  eco- 
nomic process  except  that  of  investment,  but  this  idea 
is  not  correct;  for  although  capital  is  saved,  it  is  saved 
to  be  consumed,  and  replaces  itself  quite  rapidly.  Some 
authors  have  discarded  the  idea  of  the  accumulation  of 
capital,  and  have  used  the  term  growth  of  capital  as  pref- 
erable because  of  its  constant  power  of  reproduction,  hold- 
ing that  the  increase  of  capital  is  largely  analogous  to 
the  increase  of  population.  The  creation  of  capital  depends 
largely  upon  the  direction  given  to  industry.  Anyone  who 
has  command  over  a  certain  amount  of  free  capital  has 
a  direct  or  indirect  control  of  a  corresponding  part  of  the 
productive  powers  of  industry.     There  are  various  ways 


ECONOMICS.  119 

in  which  he  may  use  this  free  capital.  He  may  give  em- 
ployment to  labor  in  the  development  of  industry  which 
will  enable  capital  to  reproduce  itself  and  perform  a 
service  in  other  ways.  The  capital  will  then  be  replaced 
with  a  margin  of  increase  which  is  called  profits.  He 
might  use  it  for  immediate  gratification  by  extravagant 
expenditure  in  costly  suppers,  but  he  prefers  the  former, 
and  the  result  is  the  growth  of  capital.  The  process  of 
the  growth  of  capital  consists  in  the  increase  of  the  fund  of 
wealth  from  which  savings  may  be  made,  and  the  determi- 
nation on  the  part  of  its  owners  to  refrain  from  immediate 
consumption  and  divert  wealth  into  the  form  of  productive 
industry.  The  former  represents  the  direct  method  of  the 
creation  of  wealth,  the  latter  that  of  saving  it  for  future 
gratification.  The  desire  for  accumulation  has  been  pres- 
ent in  economic  life,  and  has  increased  with  the  diversity 
of  occupation.  It  is  inherent  in  the  nature  of  man,  and 
influences  largely  the  will  in  its  determination  not  to 
consume  goods  but  to  preserve  them  for  future  use. 

Momentum  of  Capital. 
The  services  of  capital  in  modern  production  have  be- 
come so  very  great  that  its  power  actually  increases 
with  its  own  momentum.  Many  find  fault  with  capitalists, 
as  a  class,  because  it  appears  that  they  are  all  working 
in  combination  against  labor.  In  reality  each  one,  like 
the  laborer,  is  seeking  to  receive  the  largest  return  for 
services,  either  in  present  or  future  gratification.  In 
present  gratification  he  obtains  this  satisfaction  by  the 
lavish  expenditure  of  wealth.  He  hopes  to  receive  a  larger 
future  gratification  by  turning  the  wealth  which  he  has 
in  his  possession  into  productive  industry,  and  thus  in- 


120  ECONOMICS. 

creasing  his  wealth  and  consequently  the  means  of  future 
enjoyment.  Where  a  large  number  of  persons,  each  pos- 
sessing wealth,  enter  a  corporation  and  turn  their  atten- 
tion to  productive  enterprises,  each  has  an  industrial 
power  which  is  large  in  proportion  to  that  possessed  by 
the  single  wage-earner.  This  large  number  of  men,  moved 
by  the  same  idea,  the  gratification  of  personal  wants, 
make  it  appear  that  capitalists  have  all  combined  to  carry 
out  their  own  selfish  aims.  The  momentum  of  capital  in 
modern  industry  is  great,  and  moving  forward  with  its 
own  inertia  its  cumulative  power  is  evident.  The  power 
of  capital,  then,  rests  rather  in  its  own  inherent  nature 
than  in  the  combination  of  any  group  of  men  called  cap- 
italists. Others  have  uttered  their  objections  to  the 
modern  system  of  capitalistic  production,  and,  like  the 
socialist,  have  advocated  the  shifting  of  the  management 
of  capital  from  a  few  hands  into  the  hands  of  the  state. 
But  change  as  we  may  the  management  of  capital,  its 
power  in  production  will  not  cease. 

Economic  Significance  of  Capital  in  Production. 

Capital  is  not  only  essential  in  modern  production,  but 
frequently  is  a  limit  to  productive  industry.  As  it  takes 
the  initiative  in  constructing  buildings  and  machinery  and 
providing  raw  material,  the  amount  of  industry  will  be 
limited  by  the  amount  of  available  capital  that  may  be 
thus  used.  It  matters  not  what  form  of  productive  in- 
dustry may  be  practiced, — whether  it  is  individualistic, 
socialistic,  communistic,  or  cooperative, — capital  is  the 
essential  feature  to  be  considered  in  the  beginning  of 
any  modern  enterprise.  Even  those  persons  who  begin 
a  cooperative  industry  in  any  enterprise  on  the  smallest 


ECONOMICS.  121 

scale  must  have  room  to  work,  material  to  work  upon,  and 
tools  to  work  Avith,  before  tliej  can  accomplish  anything. 
It  was  maintained  by  John  Stuart  Mill  and  other  econo- 
mists that  capital  was  used  for  the  payment  of  wages, 
and  that  only  a  certain  number  of  men  could  be  employed, 
determined  by  the  amount  of  capital  devoted  to  that 
purpose,  called  a  wage  fund.  But  more  recently  it  has 
been  generally  held  that  the  laborer  earns  his  own 
wages  each  hour,  day  or  week  that  he  works,  and  that 
capital  merely  provides  the  means  of  employment.  But 
as  the  limited  means  of  employment  shows  the  lim- 
itation of  laborers  that  may  be  employed,  the  effect 
is  the  same  as  if  the  theory  of  the  wage  fund 
were  a  fact.  It  is  impossible  to  estimate  the  place 
of  capital  in  production  as  compared  with  labor,  but 
in  the  modern  system  of  production  capital  has  become  an 
absolute  necessity  along  with  labor. 

References:  Giflfen,  The  Growth  of  Capital;  Clark,  J.  B.,  Phi- 
losophy of  Wealth;  Nicholson,  J.  S.,  Principles  of  Political  Econ- 
omy. 


122 


ECONOMICS. 


CHAPTEK  Y. 

PRODUCTION  INFLUENCED  BY  SOCIAL  ORGANIZATION. 

Private  Organization. 
Under  free  competition  each  individual  seeks  for  the 
largest  possible  return  for  labor  or  sacrifice  expended,  but 
in  seeking  this  return  each  works  under  limited  oppor- 
tunities. Owing  to  the  fact  that  there  are  several  factors 
in  production, — land,  labor,  and  capital, — it  is  necessary 
that  the  various  forces  in  production  be  organized  by 
some  one  in  order  that  business  may  be  carried  on.  One 
man  owns  the  capital,  another  the  land,  and  another  has 
the  right  and  control  of  his  own  labor.  If  these  three 
were  to  come  together,  business  might  be  facilitated  on  a 
small  scale.  But  as  a  rule  this  question  of  bringing 
land,  capital  and  labor  into  combined  effort  is  settled  by 
a  group  of  people  called  managers  of  business,  or,  some- 
times, captains  of  industry.  A  person  who  has  the  power 
to  labor  for  wages  may  not  have  the  ability  to  conduct 
business,  and  possibly  not  the  opportunity.  Owing  to 
the  fact  that  large  amounts  of  capital,  labor  and  land  are 
essential  to  most  modern  enterprises,  it  requires  a  large 
amount  of  business  skill  and  ability  to  carry  on  such  work 
successfully.  But  few  men  have  the  ability  and  skill  to 
carry  on  a  great  business  enterprise.  These  organizers 
of  industry  induce  capitalists  to  loan  their  money,  build 
machines  and  construct  factories  and  provide  the  raw 
material,  hire  laborers  and  manage  the  business,  return- 


ECONOMICS.  123 

ing  to  capital  interest,  to  land  its  rent,  to  labor  its  wages, 
and  retaining  for  themselves  the  profit  of  management. 
Here  then  we  have  a  distinct  class  of  people  representing 
business  management,  the  fourth  great  factor  in  produc- 
tion. Too  much  importance  cannot  be  attached  to  this 
factor  in  the  modern  process,  for  after  all,  it  is  brain-power 
or  successful  management  which  more  than  anything  else 
makes  a  business  profitable  or  unprofitable.  And  it  is  the 
application  of  this  superior  skill  which  moves  the  wheels 
of  industry  and  causes  wealth  to  accumulate. 

Firm  or  Partnership. 

In  private  organization  there  have  arisen  from  time  to 
time  different  voluntary  combinations  of  men  who  have 
been  induced  to  organize  on  account  of  economic  condi- 
tions. The  development  of  these  organizations,  though 
in  themselves  voluntary,  may  be  said  to  be  natural 
on  account  of  their  essential  outcome  of  previous  condi- 
tions. In  early  times  the  manufacturer  lived  in  his  own 
home  and  gathered  about  him  apprentices  and  helpers,  and 
when  articles  were  made  he  sold  them  from  his  own  shop. 
He  conducted  his  business  alone,  with  a  very  small  amount 
of  capital  and  a  comparatively  small  amount  of  labor. 
But  after  the  invention  of  steam  and  the  rapid  development 
of  other  industries,  industrial  enterprises  became  much 
larger,  and  men  began  to  associate  others  with  them  in  the 
business  of  manufacturing  or  trading,  and  the  partnership 
developed  as  one  of  the  voluntary  associations  of  modern 

production. 

The  Corporation. 

As  industry  became  more  complex,  enterprises  became 
more  extended  and  the  establishment  of  industries  which 
called  for  a  still  larger  amount  of  capital  became  necessary. 


124 


ECONOMICS. 


A  larger  number  of  individuals  went  into  partnership 
in  production,  and  in  the  establishment  of  banks,  insurance 
companies,  the  building  of  railroads,  and  the  development 
of  land  and  mining  interests.  As  a  large  number  of  per- 
sons doing  business  together  without  the  personal  respon- 
sibility for  all,  they  became  a  menace  to  trade  and  general 
business.  In  order  that  these  institutions  might  be  legally 
created,  and  that  the  people  might  have  protection,  they 
were  incorporated  by  the  municipality  or  state.  They 
were  then  in  the  form  to  sue  and  be  sued,  and  they  could 
then  be  to  a  certain  extent  under  the  control  of  law,  be 
made  responsible  for  indebtedness.  It  is  not  the  place 
here  to  discuss  the  imperfections  of  franchises  and  of 
corporation  laws,  or  to  show  how  through  the  carelessness 
of  the  governed  and  the  faithlessness  of  the  governing 
these  corporations  frequently  became  unjust  machines  for 
arbitrarily  oppressing  those  who  were  not  so  carefully 
organized.  The  corporation  came  into  use  as  a  natural 
or  essential  voluntary  organization  of  industry,  as  part 
of  the  mechanism  of  modern  industrial  life,  and  as  such 
performs  an  immense  service  in  production  and  at  the 
same  time  wields  great  power  in  the  political  as  well  as 
in  the  industrial  world. 

Trusts  and  Combinations. 

As  industry  developed  and  power  manufacture  increased 
through  the  extended  use  of  steam,  electricity,  and  water 
transportation,  the  industrial  enterprises  of  the  world  be- 
came greater.  Competition,  which  had  been  to  a  large  ex- 
tent shifted  from  individuals  to  corporations,  became  a  bat- 
tle of  giants  in  production  and  distribution.  Corporation 
was  contending  with  corporation.    The  result  of  extra  com- 


ECONOMICS.  125 

petition  in  industries  and  the  cheapened  methods  of  pro- 
duction caused  a  fall  in  prices.  Certain  institutions  could 
not  make  fair  returns  on  investments  of  capital,  and  so  they 
placed  goods  on  the  market  below  cost  of  production.  This 
created  such  a  distrust  in  business  and  such  a  depression  of 
prices  that  there  arose  a  method  of  agreeing  upon  a  fixed 
price  of  goods  in  a  given  line.  This  method  of  arranging 
a  price  for  all  goods  of  a  given  trade  is  a  method  of  com- 
bination, and  is  for  the  purpose  of  allowing  the  least 
productive  business  in  any  given  line  to  pay  at  least  the 
cost  of  production,  and  the  more  favorably  located 
institutions  yield  a  surplus  return.  Sometimes  com- 
bination has  been  made  between  manufacturers  and 
transporters  of  goods  for  the  purpose  of  arranging  rates 
and  controlling  the  market. 

But  the  most  important  and  interesting  phase  of  this 
subject  is  the  extension  of  organization,  in  which  all  in- 
dustries in  a  certain  line  pass  into  a  superorganization 
called  a  trust,  in  which  general  stock  is  issued  in  propor- 
tion to  the  amount  each  corporation  puts  in.  So,  having 
formed  this  trust,  the  unprofitable  enterprises  are  closed 
and  only  a  few  of  the  more  profitable  are  continued  in 
business.  If  the  business  will  warrant  it,  all  of  the 
diiferent  institutions  are  kept  running.  At  any  event, 
they  are  run  or  closed  as  will  best  suit  the  interests  of  the 
trust.  Having  assumed  control  of  the  entire  manufactur- 
ing interests  in  a  given  line,  the  next  step  is  to  fix  a 
monopoly  price,  in  order  to  obtain  monopoly  profits  which 
depend  upon  the  market.  The  object  to  be  gained  is 
the  largest  net  return  for  a  given  amount  of  sacrifice, 
labor,  and  capital.     This  is  not  easy  to  secure,  for  the 


126 


ECONOMICS. 


law  of  supply  and  demand  here  enters  the  field  as  a  de- 
termining power.  This  law  assures  us  that  if  prices  fall 
there  will  be  an  increased  demand  for  goods,  but  not 
essentially  in  proportion  to  the  fall.  If  prices  rise  there 
will  be  a  falling-off  in  the  demand  for  goods,  but  not 
essentially  in  proportion  to  the  rise  in  the  price.  Expenses 
of  management  will  increase  in  a  certain  proportion  in 
respect  to  the  amount  of  goods  handled,  and  decrease  as 
the  number  of  articles  handled  decreases.  The  question 
to  be  answered  then  is.  At  what  price  will  the  largest  net 
returns  be  secured  ?  It  is  therefore  not  possible  for  a 
trust  or  monopoly  to  fix  its  price  regardless  of  the  de- 
mand, as  it  is  limited  in  what  it  may  charge  for  goods. 
Another  limitation  also  on  monopolies  is  found  in  the 
effect  of  prospective  competition.  If  it  be  found  that 
a  trust  has  been  making  enormous  profits  in  a  given  line, 
sufficient  capital  will  be  gotten  together  to  compete  with 
a  trust,  which  of  course  makes  the  largest  competitive 
units  yet  known.  The  threatened  competition  keeps 
prices  within  certain  limits,  which  frequently  brings  them 
below  monopoly  profits.  But  more  frequently  the  trusts 
themselves  overestimate  the  market  and  fix  the  monopoly 
price  above  its  normal  rate,  and  thus  injure  their  own 
business.  It  is  possible  for  a  trust  or  great  monopoly 
to  furnish  goods  to  consumers  at  a  less  rate  than  they 
can  be  furnished  under  competition  of  a  large  number  of 
establishments.  If  they  would  only  consent  to  be  reason- 
able and  fair  in  their  charges  so  as  to  make  only  reasonable 
income,  there  would  be  no  better  way  of  furnishing  goods 
to  consumers,  for  the  price  would  be  regular  and  cheaper 
than  when  furnished  by  competition  of  a  large  number 


ECONOMICS.  127 

of  institutions.  The  chief  danger  of  trusts  is  in  the  fact 
that  they  take  undue  advantage  of  the  markets.  They 
raise  the  prices  of  necessaries  suddenly,  before  the  in- 
fluence of  prospective  competition  acts.  It  takes  a  long 
time  to  get  business  in  motion  even  after  it  is  planned, 
and  the  sudden  raising  of  the  price  of  sugar,  flour  or  coal 
for  a  month  will  yield  an  immense  income  to  a  corpora- 
tion with  such  power.  This  may  be  done  in  such  a 
manner  as  to  be  little  less  than  robbery  of  consumers, 
who  must  pay  the  arbitrary  price  of  trusts. 

It  is  interesting  to  see  what  will  be  the  result  of  this 
superorganization  of  industries.  It  has  come  about  as 
an  essential  outcome  of  economic  conditions,  and  until 
economic  conditions  change  somewhat  we  cannot  expect 
it  to  be  finally  disposed  of.  Men  say  they  are  obliged 
to  combine  in  order  to  save  business  from  destruction,  so 
that  everywhere  we  find  the  rapid  development  of  trusts. 
Indeed,  in  nearly  every  great  enterprise  in  the  United 
States  at  present  the  trust  finds  its  way,  but  owing  to  its 
irregular  and  loose  organization  there  is  a  constant  tend- 
ency to  dissolution.  While  trusts  are  being  formed  rapidly^ 
they  also  appear  to  be  going  to  pieces  rapidly. 

Whether  the  trust  shall  take  its  place  as  a  legitimate 
part  of  economic  organization,  as  did  the  corporation,  or 
whether  it  will  be  gradually  eliminated  by  the  action  of 
the  law  and  possibly  by  a  survival  of  better  methods,  re- 
mains to  be  seen.  It  might  be  well  to  remark  that  capital- 
ists and  business  managers  through  excessive  combination 
point  out  the  way  to  socialism  more  than  any  other  agen- 
cies, labor  organizations  not  excluded,  and  by  their  actions 
demonstrate    a    possible    necessity    of    extreme    politico- 


128  ECONOMICS. 

economic  organization.  These  facts  influence  many  minds 
to  believe  that  state  socialism  is  one  of  the  possibilities 
of  the  future.    (See  Bk.  IV,  ch.  2.) 

Effect  of  Organized  Labor  on  Production. 
The  organization  of  labor  has  a  great  influence  on 
production,  although  the  nature  and  extent  of  this  in- 
fluence is  not  easily  defined.  For  while  the  organic  action 
of  labor  may  on  the  one  hand  keep  a  steadiness  in  the 
labor  market,  it  frequently  counteracts  this  result  by  creat- 
ing a  distrust  in  business,  causing  indirectly  the  discharge 
of  many  laborers  who  otherwise  would  continue  to  be  em- 
ployed. More  especially  is  this  result  observed  in  the 
timidity  of  managers  to  enter  new  business.  Upon  the 
whole,  it  may  be  stated  that  as  labor  organizations  become 
more  prominent  and  more  steady  in  their  organization  and 
more  reasonable  in  their  demands,  their  effect  is  to  make 
stability  of  wages  and  to  a  certain  extent  to  increase  the 
rate.  The  labor  service  is  greatly  improved  in  quality^ 
which  of  itseK  tends  to  increase  the  amount  and  the  value 
of  the  product  of  industry.  Could  laborers  and  managers 
agree  upon  a  method  of  establishing  wages,  such  as  a 
sliding  scale  or  contract  for  a  certain  period  of  time,  so 
that  the  business  managers  would  know  what  to  depend 
on,  much  advantage  would  accrue  to  industry.  The  agree- 
ment to  settle  everything  by  a  joint  arbitrating  committee 
has  worked  well  in  several  industries  where  it  has  been 
tried.  If  manufacturers  and  employers  in  general  could 
count  upon  the  stability  of  wages  and  the  absence  of  strikes 
and  other  interferences  of  industry,  production  would  be 
more  regular  and  commodities  could  be  placed  on  the 
market  at  a  smaller  cost. 


ECONOMICS. 


129 


Effect  of  Political  Organization  on  Values. 
The  strength  and  stability  of  government  has  much  to 
do  with  the  stability  of  values,  for  the  greater  the  security 
of  property  and  labor,  the  fewer  fluctuations  of  taxation 
brought  about  through  extravagance  or  excossive  demands, 
the  more  steady  will  values  become.  Every  form  of  social 
organization  has  its  influence  on  values.  The  government 
has  not  the  power  to  create  values  nor  to  destroy  them 
directly,  but  it  may  so  cooperate  with  individuals  as  to 
regulate  production.  It  may  also  by  consumption  increase 
the  demand  for  a  commodity  and  thus  advance  its  price, 
or  by  a  certain  law  increase  or  decrease  the  demand  for 
it, — thus  influencing  the  market.  The  action  of  the  govern- 
ment frequently  does  materially  affect  markets.  A  good 
example  of  this  is  seen  in  the  political  uncertainty  that 
occurs  just  before  a  presidential  election  in  the  United 
States:  it  influences  business  to  such  an  extent  as  to 
cause  stagnation  in  certain  lines.  The  turmoils  of  some 
small  nations  frequently  lead  to  a  perpetual  disturb- 
ance in  business,  rendering  capital  and  all  investments 
insecure. 

Increased  Productivity  on  Account  of  Organization. 

Thorough  economic  and  political  organization  will 
greatly  enhance  the  productivity  of  wealth,  while  on  the 
contrary  poor  organization  leads  to  distrust  and  to  expen- 
sive and  slow  production.  The  influence  of  the  firm,  the 
corporation,  the  trust,  in  the  rapidity  of  production,  is  well 
known.  The  grouping  of  people  in  well-ordered  homes, 
the  creation  of  voluntary  or  involuntary  groups  wherein 
division  of  labor  is  practiced,  enhances  the  power  of  pro- 
—9 


130 


ECONOMICS. 


duction.  Bj  organized  effort  wealth  is  rapidly  increased, 
because  all  of  the  forces  of  production  are  rendered  highly- 
efficient. 

References:  Hadley,  A.  T.,  Economics;  Ely,  R.  T.,  Labor 
Movement  in  America  ;  Gide,  Charles,  Principles  of  Political 
Economy ;  Walker,  F.  A.,  Political  Economy. 


PART  II. 

DISTRIBUTION   OF  INCOME. 


CHAPTEE  I. 
PRINCIPLES  OF  DISTRIBUTION. 

Net  Product. 

The  net  product  of  industry  is  that  which  remains  after 
all  expenses  of  production  have  been  paid.  By  expenses  of 
production  is  meant  only  the  waste  or  use  of  capital, 
which  must  be  replaced,  and  the  income  over  and  above 
this  is  called  the  net  product.  In  considering  a  given 
manufacturing  plant  from  the  standpoint  of  the  technology 
of  wealth-getting,  the  net  income  would  be  that  remain- 
ing after  all  expenses  of  rent,  interest,  wages  and  expenses 
of  management  have  been  paid.  But  it  must  be  remem- 
bered that  the  net  product  considered  here  is  the  amount 
distributed  among  the  different  economic  groups  repre- 
sented, namely:  landlords,  capitalists,  wage-earners,  and 
managers;  or  in  other  words,  into  different  shares,  such 
as  rent,  interest,  wages,  and  profits.  The  methods  of  dis- 
tributing the  net  product  are  worthy  of  consideration. 
First,  distribution  of  wealth  in  this  connection  has  ref- 
erence to  ownership  of  property  rather  than  exchange  of 
place  or  location  on  the  earth's  surface.    Into  whose  hands 

(131) 


132 


ECONOMICS. 


does  the  net  product  of  industry  fall?  In  investigating 
the  principles  of  distribution  is  is  well  to  assume  their 
operation  under  laws  of  free  competition.  We  are  not 
concerned  at  present  with  the  actual  conditions  of  an 
industry  instituted  for  the  purpose  of  making  money,  but 
rather  with  the  general  laws  arising  from  economic  pro- 
duction without  interference  with  concrete  conditions. 
Indeed,  all  economic  law  that  may  be  demonstrated  to 
be  final  and  exact  must  operate  under  the  conditions  of 
free  competition.  Every  discussion  of  the  abstract  prin- 
ciples of  political  economy  recognizes  this  fact.  Interfer- 
ences which  may  be  caused  by  monopoly  or  by  government 
are  to  be  considered  in  a  separate  connection. 

Nature  of  Distribution. 
Mr.  Mill  held  that  production  is  natural  and  therefore 
its  laws  may  be  observed,  but  that  distribution  is  artificial, 
consequently  it  is  not  possible  to  discover  constant  and 
certain  laws.  It  is  true  that  production  is  less  interfered 
with  by  conscious  human  influences  than  distribution,  the 
latter  being  disturbed  in  its  natural  course  of  free  com- 
petition more  readily  than  the  former;  but  there  is  no 
reason  for  assuming  that  there  are  not  natural  processes 
in  distribution  as  well  as  in  production.  The  Socialists 
advance  the  idea  that  natural  distribution,  like  natural 
production,  is  the  only  just  method.  The  only  difficulty 
in  all  this  discussion  is  to  understand  what  is  meant  by 
the  term  "  natural."  What  the  socialists  consider  natural 
distribution  is  finally  settled  when  they  discard  the 
laissez-faire  doctrine,  or  that  of  absolute  freedom  in  com- 
petition, and  insist  that  the  state  should  regulate  this 
just  distribution,  as  it  is  the  only  body  that  has  power 


ECONOMICS. 


133 


to  attend  to  it  justly.  Henry  George  states  also  that  the 
"just  distribution  of  wealth  is  manifestly  a  natural  distri- 
bution of  wealth,  and  this  is  that  which  gives  to  him  who 
makes  it  and  secures  to  him  who  saves  it."  Here  again 
is  the  question  of  the  use  of  the  term  natural.  It  is 
evident  that  it  is  determined  by  purely  a  priori  argument. 
It  may  be  assumed  that  there  are  natural  economic 
laws  based  upon  the  active  conditions  of  economic  society, 
but  they  do  not  assume  a  state  of  nature,  for  society  is 
built  up  by  a  struggle  against  nature,  or  rather  by  tho 
mastery  of  nature.  In  other  words,  the  economic  law  of 
distribution  does  not  in  any  way  precede  the  construction 
of  economic  society,  and  what  might  be  natural  distribution 
under  hand  manufacture  might  be  unnatural  under  power 
manufacture.  Yet,  in  the  consideration  of  the  main  facts 
of  distribution, — that  is,  into  whose  hands  the  net  product 
will  fall  under  a  state  of  free  competition, — and  in  deter- 
mining upon  what  principles  the  net  product  of  wealth 
passes  into  certain  hands,  we  may  appeal  to  general  laws. 
Afterwards  we  may  consider  the  exceptions  to  these  laws 
and  inquire  into  their  various  interferences,  for  it  is  evi- 
dent that  these  laws  do  not  consider  the  necessities  of 
man  nor  the  justness  of  distribution.  They  only  ask  what 
happens,  and  why. 

Divisions  of  Net  Product. 

The  great  problems  of  economic  society  have  been  stated 
as  follows :  first,  how  to  create  the  largest  aggregate  of 
utilities,  or  of  wealth;  second,  how  justly  to  divide  this 
amount;  and  third,  how  to  make  the  product  minister  to 
the  permanent  rather  than  to  the  transient  well-being  of 
society.    These  problems  go  beyond  the  bare  expression  of 


134 


ECONOMICS. 


economic  law,  and  seek  the  ultimate  of  economic  exist- 
ence. With  society  putting  forth  its  unconscious  effort 
to  create  economic  goods,  and  each  group  seeking  to  ob- 
tain the  largest  return  for  time  and  service  in  the 
form  of  wealth,  it  is  found  that  the  net  product  falls 
regularly  into  four  categories:  rent,  interest,  wages,  and 
profits ;  to  which  is  added  sometimes,  for  the  sake  of  con- 
venience, a  fifth  category,  called  "anomalous"  fortune, 
which  is  only  a  term  to  represent  the  unclassified.  But 
how  are  we  to  determine  the  amount  which  will  pass  into 
each  separate  category  ?  Is  there  a  law  which  will  deter- 
mine this  ?  It  is  easy  to  observe  that  the  amount  which 
goes  to  rent,  interest,  or  wages,  for  instance,  is  quite  a 
constant  quantity.  It  is  also  conceded  that  the  average 
profit  from  year  to  year  remains  about  the  same.  But 
what  determines  the  quantity  which  passes  into  each  of  the 
several  categories  ?  The  surplus  which  obtains  on  account 
of  excessive  fertility  or  favorable  location  of  land  is  called 
rent.  Rent  is  easily  determined  as  the  difference  between 
the  return  upon  that  land  which  will  just  pay  expenses 
of  cultivation  and  the  return  from  more  fertile  land.  If 
this  principle  is  extended  to  other  industries,  monopoly 
or  proprietorship  of  fixed  material  or  conditions,  the  rent 
principle  appears.  Wages  are  held  to  be  the  reward  of 
labor,  distinct  from  the  earnings  of  capital  or  any  other 
agency.  The  laborer  receives  wages  for  his  toil.  The 
manager  of  business  receives  profits  as  his  reward  for 
ability  to  organize  and  superintend  business.  The  capi- 
talist receives  interest  on  account  of  his  ownership  of 
capital,  and  on  account  of  the  increase  of  the  net  prod- 
uct due  to  the  services  of  capital.     The  fifth  category, 


ECONOMICS.  185 

whioli  is  sometimes  used,  that  of  anomalous  fortune,  would 
include  all  those  material  goods  not  included  in  the  pre- 
ceding categories.  The  above  statements  represent  the 
factors  of  the  four  categories  of  distribution. 

Undivided  Net  Product. 

It  sometimes  happens  that  a  small  proprietor  who  man- 
ages his  own  business  receives  the  entire  product, — rent, 
wages,  interest,  and  profits.  As  for  example,  a  small 
farmer  who  owns  his  farm  receives  rent  on  account 
of  fertility  and  location,  wages  on  account  of  his  own 
labor,  interest  on  account  of  the  capital  he  has  invested, 
and  profits  on  account  of  the  skill  in  managing  his  affairs. 
Yet  in  economic  analysis  all  of  these  divisions  are  clearly 
discerned,  for  rent  arises  out  of  land  whether  a  man 
works  his  own  land  or  that  of  another. 

Law  of  Equal  Betums. 
In  determining  these  divisions  of  the  net  products  there 
are  certain  laws  which  may  be  observed,  although  in  prac- 
tice, owing  to  certain  interferences,  they  show  nothing 
more  than  tendencies.  Indeed,  a  large  number  of  economic 
laws  when  put  to  final  test  show  nothing  more  than  gen- 
eral tendencies ;  yet  these  general  tendencies  are  important 
for  consideration.  Let  us  suppose  that  we  have  free  com- 
petition among  all  industrial  people,  and  that  we  have 
likewise  perfect  mobility  of  capital  and  labor  so  that  they 
will  go  wherever  needed,  and  that  there  is  sufficient  land 
to  be  called  into  operation  when  it  is  needed.  Add  to 
these  conditions  one  other,  namely,  that  each  knows  what 
other  business  men  are  doing  or  about  to  do;  then  we 
shall  find  that  the  last  increment  of  capital  or  labor  or 
skill  will  receive  the  same  remuneration  as  the  preceding 


136  ECONOMICS. 

increment  of  each  most  recently  employed  in  any  way. 
That  is,  a  dollar,  or  a  day's  labor,  or  a  day's  managing 
service,  will  yield  in  each  case  as  much  in  one  business 
as  it  would  in  another,  and  will  be  determined  by  the 
remuneration  of  services  in  the  last  investment,  ^ow 
this  arises  out  of  the  fact  that  these  various  factors  of 
production  which  are  enumerated  will  seek  the  largest 
possible  return  of  wealth  for  a  given  sacrifice.  For  it  is 
easy  to  see  that,  under  the  conditions  mentioned  above, 
labor  will  tend  to  go  where  it  will  obtain  the  highest 
reward,  and  if  perfectly  mobile  the  equilibrium  of  demand 
and  supply  will  be  established  and  wages  in  the  same  em- 
ployment will  be  the  same  the  world  over.  The  same  is 
true  for  capital.  For  if  men 'understand  that  other  busi- 
nesses are  more  remunerative,  and  if  capital  moves  freely; 
it  will  seek  the  highest  rewards,  but  in  its  attempt  to  do 
this  the  equilibrium  of  supply  and  demand  will  again  be 
established. 

Now  it  is  well  known  that  capital,  labor  and  managing 
ability  are  not  perfectly  mobile,  and  it  is  also  well  known 
that  each  man  does  not  know  what  all  other  business  men 
are  doing  or  are  about  to  do.  But  there  is  a  constant^ 
tendency  to  realize  this  principle;  that  is,  there  is  a 
tendency  in  interest  on  capital  to  become  the  same  no 
matter  where  it  is  invested,  for  wages  to  reap  a  certain 
average  rate,  and  for  rent  to  become  more  constant  from 
year  to  year.  The  interference  of  monopoly  and  govern- 
ment destroys  the  mobility  of  capital  and  labor,  and  thus 
modifies  the  action  of  the  laws  of  distribution  in  relation 
to  them.  Yet,  upon  the  whole,  equal  returns  to  last  in- 
vestments appear  to  be  more  and  more  constant. 


ECOKOMICS.  181 

Dynamic  Law  of  Distribution. 

It  has  already  been  stated  that  the  divisions  of  the  net 
product  into  wages,  rent,  profit,  and  interest,  if  taken 
at  any  given  instant  will  represent  a  more  or  less  constant 
return  to  each,  but  if  industrial  processes  are  set  in  motion 
the  relations  are  liable  to  change  from  time  to  time.  Thus, 
the  amount  of  labor,  land  or  capital  in  the  market  at  any 
given  time,  varies,  and  hence  yields  a  variable  amount 
to  wages,  rent  and  interest,  respectively.  Considering 
productive  enterprise  in  motion,  land,  labor,  capital,  and 
managing  ability  will  tend  to  be  remunerative  inversely 
in  proportion  to  their  increase;  that  is,  the  one  that  has 
the  smallest  relative  quantity  in  the  market  reaps  the 
greatest  reward  at  the  expense  of  others.  In  other  words, 
if  labor  and  capital  remain  the  same  in  quantity  and  a 
large  amount  of  land  be  suddenly  thrown  upon  the  market, 
rent  will  have  a  tendency  to  be  low  while  labor  and  capital 
are  called  into  use,  and  will  reap  a  relatively  larger  in- 
come in  proportion  to  services.  Or,  if  land  and  capital 
remain  constant  in  quantity,  and  a  large  amount  of  labor 
be  thrown  suddenly  upon  the  market,  wages  will  tend  to 
fall  and  rent  and  capital  increase  in  proportion.  Thus, 
if  capital  is  doubling  itself  in  forty  years  and  labor  in 
twenty,  land  remaining  constant,  wages  will  be  lowered 
and  interest  raised.  It  is  in  this  way  that  a  sudden  in- 
crease in  the  laboring  population  tends  to  lower  wages,  or 
the  taking  up  of  a  large  area  of  agricultural  land  sud- 
denly, lowers  rent. 

^Nevertheless,  under  normal  conditions  of  industry  the 
law  of  supply  and  demand  is  brought  into  operation  and 
the  equilibrium  of  distribution  appears.     Thus,  if  a  largo 


138 


ECONOMICS. 


amount  of  labor  is  thrown  into  the  market  it  seeks 
employment,  and  if  capital  is  available  it  employs 
labor.  If  land  is  available  it  is  also  called  into  use,  so  that 
they  stand  relatively  in  the  same  position  as  before.  This 
law  manifests  itself  then  largely  in  the  irregularity  of 
social  development,  which  is  soon  overcome  by  the  reestab- 
lishment  of  normal  relations. 

How  the  Gross  Product  is  Distributed. 

By  gross  product  is  meant  the  entire  amount  earned 
in  a  given  industry,  or,  if  considered  in  the  concrete, 
of  a  given  plant  of  said  industry.  It  represents  the  entire 
earning  capacity  of  an  industry  as  evident  from  its  annual 
output  before  expense  of  running  or  economic  distribu- 
tion has  taken  place. 

In  considering  a  specific  business,  the  gross  profits  are 
divided  into :  replacement,  which  means  the  making  good 
of  the  loss  of  capital  which  has  been  invested  in  any  given 
business;  interest,  which  must  be  paid  for  the  use  of 
capital  to  the  man  who  loans  it;  insurance  or  a  certain 
sum  set  apart,  taken  from  gross  profits,  to  cover  past  or 
future  losses,  because  the  revenue  varies  from  year  to 
year.  The  wages  of  superintendence  or  management  gen- 
erally appear  in  the  forms  of  salary;  and  finally,  the 
fifth  element  is  called  pure  profit.  Tliis  accrues  to  the 
manager  on  account  of  superior  wisdom  in  the  manage- 
ment of  business.  This  represents  the  analysis  of  a  single 
business  from  an  economic  standpoint. 

It  is  clear  from  the  foregoing  that  the  amount  of  profits 
which  each  factor  receives  is  not  immediately  dependent 
upon  the  proportional  amount  each  corresponding  factor 
in  production  supplies  in  the  process  of  creating  wealth, 


ECONOMICS. 


139 


hence  we  must  find  some  other  determining  cause.  One 
school  of  economists  has  held  that  nature,  lahor  and  cap- 
ital are  the  three  sources  of  value,  and  from  each  one 
there  flows  a  stream  of  value  coming  from  its  respective 

Diagram  A 
ProportionaCn  'Division. 


Capital. 

Managing 
Ability. 


Diagram    C 


Labor 


Land. 


Capital 


— T 

I-     o 


noqmq    w 
Ability       b 


Interest 


Profits 


Diagram    B 

Value. 


variable  .; 

proportions 

of 

variable 

^  products. 

Capital. 

Manaqinq 
Ability. 

source;  that  the  amount  and  volume  of  this  stream  is 
dependent  upon  the  power  of  land,  lahor  and  capital  in 
production.  (See  diagram  A.)  It  is  held  that  there  are 
three  distinct  streams  flowing  from  source  to  mouth ;  that 


140  ECONOMICS. 

just  the  same  amount  of  value  as  has  flowed  from  each 
source  passes  into  the  income  of  the  persons  who  own 
the  soil,  the  capital,  or  furnish  the  labor;  that  the  force 
of  the  stream  of  value  is  dependent  immediately  upon  the 
force  of  the  stream  of  productive  power;  and  that  each 
source  thus  represents  a  distinct  productive  power,  with  a 
distinct  quantity  of  economic  goods,  each  having  definite 
value.  This  of  course  makes  distribution  a  question  of 
production,  which  is  scarcely  true. 

If  we  were  to  carry  out  the  figure  it  might  be  said 
that  the  truth  lies  in  the  fact  that  the  three  separate 
streams  of  productive  power  when  once  entering  into  the 
process  of  production  spread  out  again  into  distinct 
branches  in  their  value-creating  power.  (See  diagram  B.) 
That  is,  the  stream  comes  under  the  influences  of  the  causes 
which  create  value,  namely,  the  demand  for  goods,  which 
includes  the  ability  and  the  willingness  of  men  to  take 
economic  goods  at  a  certain  market  value.  The  value- 
creating  power  in  production  depends  upon  the  intensity 
of  men's  needs  and  the  quantity  of  means  which  they  have 
for  supplying  these  wants.  That  is,  the  amount  of  income 
flowing  into  these  three  separate  categories  will  depend, 
not  upon  the  several  amounts  of  powers  of  production,  but 
what  has  been  separated  out  from  the  three  streams  in  the 
figure  by  the  value-creating  power  of  man;  that  is,  we 
refer  it  again  to  the  law  of  supply  and  demand  and  market 
valuation. 

Another  group  of  economists  assume  that  labor  is  en- 
titled to  the  entire  product  because  it  is  the  source  of 
value,  and  that  labor  would  receive  this  product  if  it  were 
not  for  a  band  of  robber  landlords,  capitalists  and  managers 


ECONOMICS. 


141 


who  suddenly  appear  to  divide  the  returns  of  labor  among 
themselves.  This  argument  cannot  be  maintained,  because 
labor  is  not  the  only  cause  of  value ;  nor  would  it  be  true 
that  after  rent  and  interest  had  been  separated  out,  wages 
would  take  what  was  left^ — for  indeed  there  is  no  residual 
claimant,  either  in  rent,  interest,  or  profits.  (See  dia- 
gram C.) 

The  problem  may  be  stated  thus :  Interest  is  a  varying 
proportion  of  varying  product  of  industry;  wages  repre- 
sent a  variable  proportion  of  a  varying  product  of  in- 
dustry ;  rent  is  a  varying  proportion  of  a  varying  product 
of  industry;  and  profits  are  a  varying  proportion  of  a 
varying  product  of  industry. 

Let  us  refer  once  more  to  market  values,  and  ascer- 
tain how  they  are  created.  In  order  to  simplify  matters, 
let  us  express  the  market  value  in  terms  of  price,  which 
is  the  money  measure  of  exchange  value.  People  do  not 
exchange  goods  in  a  market  without  a  probability  of  some 
advantage  derived  from  exchange.  The  strength  of  the 
demand  relative  to  the  supply  will  fix  the  valuation  of 
goods  in  a  market.  Let  us  take  a  very  simple  case,  a  case 
of  a  single  transaction  between  two  individuals.  Suppose 
Mr.  A  desires  to  buy  a  horse,  and  puts  the  same  estimate 
on  the  value  of  one  hundred  dollars  that  he  does  on  the 
horse.  It  is  evident  that  he  will  not  pay  more  than  one 
hundred  dollars  for  a  horse.  His  neighbor,  Mr.  B,  has 
a  horse  which  he  values  at  forty  dollars.  It  is  evident 
that  he  will  not  sell  his  horse  for  less  than  this.  There 
is  a  possibility  that  an  exchange  will  take  place  here 
somewhere  between  forty  and  one  hundred  dollars. 
Should  it  take  place  at  seventy  dollars,  each  man  will 


142  ECONOMICS. 

have  a  gain  of  thirty  dollars.  That  is,  the  price  will  lie 
somewhere  between  the  maximum  valuation  placed  upon 
the  horse  by  the  buyer  and  the  minimum  placed  upon  it  by 
the  seller. 

"Now  suppose  instead  of  one  man  there  are  three  bid- 
ding for  the  horse ;  suppose  A,  C,  and  D  wish  to  buy  the 
horse.  A,  as  before,  values  the  horse  at  one  hundred 
dollars,  C  values  it  as  equivalent  to  eighty  dollars,  while  D 
considers  the  horse  worth  to  him  only  sixty  dollars.  It  is 
evident,  although  only  one  man  can  buy  the  horse,  it  is 
available  to  any  one  of  the  three.  B  still  values  his  horse 
at  forty  dollars,  and  the  others  bid  in  competition  for  it. 
When  they  reach  $60,  D  drops  out;  when  they  reach 
$80,  C  will  drop  out  of  the  race,  and  A,  who  is  willing  to 
pay  $100,  will  buy  the  horse  at  the  lowest  margin  possible 
over  what  the  next  highest  bidder  offers,  namely,  $80..  In 
this  one-sided  competition,  which  frequently  occurs,  the 
price  is  fixed  somewhere  between  the  valuation  of  the 
successful  bidder  and  that  of  the  highest  unsuccessful 
bidder,  with  a  tendency  to  approximate  the  latter. 

Suppose  now  we  take  the  third  case,  where  we  have  a 
number  of  buyers  competing  with  a  number  of  sellers 
for  a  given  article,  which  is  a  true  market.  Suppose  there 
is  a  case  of  six  buyers  competing  for  a  barrel  of  apples, 
and  l^ve  sellers,  each  wishing  to  sell  one  barrel.  Let  us 
say  A  will  pay  any  price  below  $4.00 ;  B  any  price  below 
$3.50 ;  C  any  price  below  $3.00 ;  D  any  price  below  $2.50; 
E  any  price  below  $2.25;  and  F  will  pay  any  price  below 
$2.00.  Of  those  who  have  the  apples  for  sale,  suppose 
that  X  will  accept  for  a  barrel  of  apples  any  price  above 
$1.00;  seller  Y  any  price  above  $1.50;  seller  Z  any  price 


ECONOMICS.  143 

above  $2.00;  seller  W  any  price  above  $2.50;  and  seller 
S  will  accept  any  price  above  $3.00.  It  will  be  seen  that 
at  $1.00  there  will  be  six  buyers  and  one  seller;  at  $1.50 
there  will  be  six  buyers  and  one  seller;  at  $2.00  there 
will  be  five  buyers  and  two  sellers;  at  $2.50  there  will  be 
three  sellers  and  three  buyers;  at  $3.00  two  buyers  and 
four  sellers;  while  at  $3.50  there  would  be  five  sellers  and 
only  one  buyer.  It  will  be  seen,  then,  from  this  state- 
ment, that  at  $2.50  there  will  be  as  many  buyers  as  sellers, 
and  that  this  number  represents  a  majority  of  the  num- 
ber of  sellers.  At  or  near  this  point  the  market  will  be 
fixed,  because  outside  buyers  and  sellers  have  not  influence 
enough  to  modify  prices.  The  price  may  be  said  to  be 
fixed  then  somewhere  between  the  actual  valuation  of  the 
last  buyer  and  the  last  seller.  I^ow  it  is  evident  from  this 
that  the  entire  product  thrown  upon  the  market  must 
vary,  not  so  much  with  the  combined  force  of  powers 
being  used  in  production  as  the  subjective  value  placed 
upon  these  products,  which  is  dependent  immediately 
upon  the  intensity  of  man's  desires  for  the  goods  produced. 
If  we  turn  our  attention  to  the  division  of  this  varying 
quantity  into  wages,  interest,  rent,  profits,  etc.,  we  must 
consider  each  specific  case. 

If  wages  be  considered,  first,  what  is  the  wage-earner's 
share  of  this  varying  proportion  ?  It  will  be  determined 
by  the  value-creating  power  as  estimated  by  the  market 
valuation  of  goods,  which  is  determined  by  the  law  of 
supply  and  demand  in  combination  with  capital  and  land. 
If  there  is  no  limit  to  the  supply  of  laborers,  while  the 
total  amount  of  wages  received  may  be  greater  than  the 
total  amount  of  capital  in  any  given  production,  the  former 


144  ECONOMICS. 

will  be  out  of  proportion  to  the  total  number  of  laborers 
employed,  and  the  laborers  themselves  competing  with  each 
other  for  this  total  amount  may  reduce  wages  on  account 
of  the  law  of  diminishing  returns,  down  to  the  minimum 
of  living.  That  is,  the  individual  laborer  must  depend 
primarily  upon  the  valuation  placed  upon  the  products  of 
his  labor  in  combination  with  other  forces,  and  secondarily 
upon  competition  with  his  fellows  for  his  share  in  the  total 
product.  ^Nevertheless,  in  normal  conditions  of  business 
the  rate  of  wages  tends  to  remain  somewhat  constant,  or 
to  improve  with  improving  business  and  decline  with 
declining  business.  We  can  account  for  this  in  no  other 
way  than  from  the  fact  that  the  presence  of  a  large  number 
of  able-bodied  men  seeking  employment,  other  things 
being  equal,  will  bring  into  operation  a  larger  amount  of 
available  land  and  induce  a  larger  amount  of  capital  to 
seek  investment,  all  of  which  will  require  a  larger  amount 
of  managing  ability.  Therefore  there  is  a  tendency  for 
not  only  the  total  amount  of  wages  under  normal  condi- 
tions to  remain  about  the  same,  but  the  rate  of  wages  among 
laborers  of  the  same  grade  to  remain  more  or  less  constant. 
Especially  is  this  true  when  we  consider  that  of  any  staple 
commodity  in  the  market,  the  market  price,  though  not 
caused  by  the  cost  of  production,  has  a  tendency  to  approxi- 
mate to  this  finally.* 

Suppose  now  that  the  entire  product  in  a  given  business 
be  one  thousand,  and  that  ten  units  of  land  yield  eighty 
units  of  rent,  ten  units  of  capital  yield  one  hundred  sixty 
units  of  interest,  ten  units  of  organizing  power  yield  one 
hundred  sixty  units  of  profits,  and  ten  units  of  labor  yield 
six  hundred  units  of  wages.     It  is  evident  that  the  average 

*  See  Thompson,  Theory  of  Wages. 


ECOITOMICS.  145 

wages  received  by  one  unit  of  labor  would  be  sixty.  If 
the  population  under  normal  conditions  should  steadily 
increase  until  it  was  doubled,  we  might  assume  that  the 
product  would  be  doubled  and  we  should  get  two  thousand 
instead  of  one  thousand ;  that  twenty  units  of  land  would 
yield  one  hundred  sixty  units  of  interest;  twenty  units 
of  capital,  three  hundred  twenty  units  of  interest ;  twenty 
units  of  organizing  power,  three  hundred  twenty  units  of 
profits;  while  twenty  units  of  labor  would  yield  just 
double  what  they  did  before,  or  twelve  hundred  units  of 
wages,  the  average  wages  for  each  normal  unit  remaining 
sixty,  and  so  for  each  other  factor  in  production.  If,  on 
the  contrary,  we  should  have  a  sudden  influx  of  a  lower 
grade  of  labor,  the  product  would  not  be  doubled  under 
other  similar  conditions.  Suppose  now  that  the  product 
amounts  to  only  eighteen  hundred  instead  of  two  thousand. 
In  this  case  fifteen  units  of  land  would  yield  one  hundred 
thirty-five  units  of  rent ;  fifteen  units  of  capital  would 
yield  two  hundred  seventy  units  of  interest ;  fifteen  units 
of  organizing  power  two  hundred  seventy  units  of  profits. 
The  total  to  wages  then  would  be  the  difference  between  the 
sum  of  these  and  eighteen  hundred,  or  eleven  hundred 
twenty-five.  But  the  labor  having  been  doubled,  namely, 
twenty  units,  the  yield  here  of  wages  is  only  fifty-six  and 
one-fourth  to  each  unit  of  labor.  While  the  entire  amount 
of  wages  by  the  influx  of  cheap  labor  has  been  increased, 
the  rate  to  each  individual  has  been  diminished.  It  might 
likewise  be  shown  that  land,  capital,  and  organizing  power 
receive  a  diminishing  product  per  unit  through  the  intro- 
duction of  a  large  amount  of  unskilled  labor. 

This  harmonizes  the  two  apparently  opposing  theories 

—10 


146 


ECONOMICS. 


respecting  wages,  and  makes  them  complements  of  each 
other.  (1)  That  wages  of  all  laborers  in  similar  employ- 
ments are  determined  by  what  the  laborer  can  produce 
who  works  on  the  margin  of  cultivation  or  the  margin  of 
utilization.  Here  the  laborer  receives  as  wages  the  total 
product,  and  if  other  laborers  receive  more  than  he,  he 
would  leave  the  margin  to  compete  with  them  and  the 
margin  would  rise.  Hence  the  equalizing  tendency  of 
wages  brings  them  all  down  to  the  marginal  laborer  who 
works  upon  the  poorest  opportunities. 

(2)  The  other  view  asserts  that  wages  are  determined  by 
the  standard  of  life  of  the  laborer.  The  general  rate  of 
wages  in  any  country,  class  or  industry  is  the  standard 
of  living  of  the  most  expensive  families  furnishing  a  nec- 
essary part  of  the  supply  of  labor  in  that  country,  class, 
or  industry.  The  first  is  the  objective  law  of  wages,  the 
second  is  the  subjective. 

Both  of  these  laws  are  subservient  to  the  law  of  supply 
and  demand,  and  the  value-creating  power  of  the  pro- 
ductive process.  The  larger  the  supply,  the  lower  will 
be  the  marginal  product  compared  with  the  labor  of  pro- 
ducing it.  Hence,  whatever  controls  the  supply  of  labor 
controls  the  marginal  value  of  its  product,  which  deter- 
mines the  general  rate  of  wages. 

It  is  held  by  some  in  this  connection  that  the  manager 
of  business,  the  entrepreneur,  is  the  residual  claimant, 
and  that  the  large  products  of  industry  are  absorbed  in 
profits.  But  it  will  be  found  under  free  competition  that 
profits  are  governed  as  specifically  by  law  as  interest,  rent, 
or  wages.  The  gross  profits  of  any  business  are  made  up 
of  what  we  term  the  replacement  of  capital,  the  insurance, 


ECONOMICS.  147 

interest,  wages  of  superintendence,  and  what  we  may  call 
pure  profits.  Pure  profits  are  the  only  kind  which  should 
be  classified  along  with  pure  wages,  economic  rent,  or  eco- 
nomic interest.  Mr.  Walker  attempted  to  show  that  the 
profits  received  by  different  employers  in  the  same  enter- 
prise vary  according  to  the  law  of  rent,  and  that  there 
are  certain  industries  that,  having  paid  interest,  wages 
of  superintendence,  insurance,  and  replaced  the  prin- 
cipal,— the  capital, — there  was  nothing  left  for  the 
entrepreneur ;  and  for  this  lowest  class  of  industries 
there  was  a  constant  gradation  to  the  highest,  which  paid 
a  large  return  of  net  profits  on  account  of  superior  position 
or  management.  That  there  are  certain  industries  that 
pay  no  net  profits,  every  one  knows ;  that  there  are  others 
in  the  same  line  that  pay  small  net  profits,  is  evident; 
while  there  are  still  others  that  pay  a  large  return  in 
profits.  It  is  also  evident  that  unless  a  manager  of  any 
business  can  pay  the  expenses  of  that  business  he  will 
not  continue  in  it,  except  it  be  through  a  short  period  of 
hard  times  in  order  to  tide  over  business  to  better  times, 
or  to  keep  from  losses.  But  under  free  competition  the 
total  amount  of  profits  going  to  the  entrepreneur  or  man- 
ager in  any  given  line  of  industrial  operation  will  depend 
again  upon  the  demand  and  supply,  or  the  subjective 
valuation  of  the  goods  produced,  by  the  consumers  of 
those  goods;  and,  secondarily,  upon  the  competition  of 
the  number  of  entrepreneurs  or  managers  seeking  invest- 
ment in  any  given  line.  But  there  are  so  many  disturbing 
elements  which  modify  profits  that  it  has  the  appearance 
of  being  less  steady  than  any  other  return  in  business. 
Thus,  in  case  of  a  drouth  or  a  failure  in  business,  wages, 
rent,  or  interest,  is  each  steadier  than  profits. 


148 


ECONOMICS. 


Rights  of  Property. 
The  theory  of  the  rights  of  property  is  frequently  dis- 
cussed by  economists,  and  it  has  its  place  here  in  distri- 
bution, for  it  has  a  great  influence  in  this  part  of  economic 
life.  Some  economists  have  held  that  the  right  to  hold 
property  is  based  upon  labor.  According  to  their  ideas, 
the  man  should  be  the  owner  of  the  things  created  by 
his  own  exertion.  If  this  theory  is  put  into  practice  it 
leads  to  absolute  confusion,  for  when  a  man  possesses  a 
house,  a  forest,  or  a  farm,  it  may  not  have  been  his  own 
labor  that  created  any  one  of  these ;  nor  in  the  goods  that 
fill  a  store  do  we  find  any  evidence  of  the  creative  power 
of  the  owner.  From  a  legal  consideration  the  origin  of 
the  right  of  property  is  not  discussed  very  fully.  Lawyers 
have  taken  the  right  of  property  as  a  fact,  and  the  rights 
of  property  are  secured  only  through  the  power  of  the 
state.  To  define  property  by  its  attributes,  accepting  H 
as  a  fact,  is  the  extent  of  the  legal  conception.  Certain 
persons  have  advanced  the  theory  of  natural  rights,  hold- 
ing that  property  is  merely  an  extension  of  human  per- 
sonality over  external  nature.  This  is  a  very  imperfect 
conception,  for  it  leads  to  the  assumption  that  all  people 
are  property-owners.  The  occupation  theory  ascribed 
property  rights  to  the  one  who  first  obtained  possession 
and  whose  property  was  finally  recognized  by  his  asso- 
ciates. Doubtless  this  is  the  atomic  theory  of  the  origin 
of  property,  though  it  has  been  much  extended.  The  indi- 
vidual and  collective  ownership  of  property  in  the  early 
period  points  to  the  idea  of  occupation  as  the  first  recog- 
nized title.  It  is  evident  that  there  is  some  truth  in  each 
one  of  these  theories,  but  that  the  real  test  is  in  the  prop- 


ECONOMICS.  149 

ertj  rights  as  evidenced  in  the  Roman  law  and  the  French 
civil  code,  and  as  such  is  recognized  in  all  modern  civil 
and  common  law. 

The  rights  of  property  have  much  to  do  with  distribu- 
tion. Certain  property  is  rapidly  consumed  and  the  in- 
fluence of  ownership  is  very  light;  other  property  lasts 
a  long  time :  indeed  land  itself  lasts  forever,  which  makes 
a  vast  difference  in  distribution.  Other  forms  of  wealth 
or  property,  such  as  government  stocks  or  bonds,  last  as 
long  as  governments  themselves.  These  highly  perpetual 
classes  of  goods  descend  by  will  or  inheritance  from  one 
person  to  another,  and  the  distribution  of  wealth  is  thus 
very  much  affected.  There  are  persons  who  are  scarcely 
capable  of  earning  a  respectable  living  single-handed,  yet 
they -inherit  fortune  from  a  distant  relative;  the  result 
is  a  distribution  of  wealth,  and  a  net  product  of  industry 
soon  begins  to  flow  through  rent  or  interest.  To  avoid 
this  principle  of  distribution  by  means  of  inheritance,  the 
socialist  sought  to  dispose  entirely  of  inheritance ;  that  is, 
to  abolish  it.  People  who  complain  bitterly  about  inequali- 
ties of  economic  distribution  are  opposed  to  inheritance, 
for  it  tends  to  perpetuate  and  aggravate  these  inequalities. 

The  exercise  of  the  rights  of  property  may  be  by  a 
private  person  or  individual,  or,  through  the  operation 
of  the  law,  by  a  group  of  individuals  in  corporate  capacity. 
The  rights  of  property  as  exercised  by  corporations  vary 
somewhat  from  the  rights  of  property  of  individuals,  for 
in  all  corporations  we  find  that  the  majority  rule;  while 
the  members  associate  themselves  in  a  group  under  contract 
to  carry  out  different  kinds  of  work,  they  also  agree  to 
submit  to  whatever  policy  is  adopted  by  the  majority  or 


150 


ECONOMICS. 


the  policy  of  the  states  making  the  corporate  laws.  Also, 
the  extension  of  powers  granted  these  corporations  by  the 
states  gives  them  superior  rights,  such  as  the  right  of 
eminent  domain  and  the  income  arising  therefrom.  The 
ownership  of  public  property  is  manifest  through  what 
are  known  as  political  corporations,  the  general  policy 
of  the  state  being  to  manage  the  property  for  the  people 
at  large.  Here  then  we  have  a  variety  of  ownership 
which  has  grown  up  through  custom,  and  its  authority 
and  right  need  not  be  questioned.  The  only  facts  to  be 
observed  are,  as  to  whether  there  is  a  definite  description 
of  the  property,  and  whether  a  legal  title  can  be  shown  to 
give  to  it  all  the  rights  and  privileges  of  property.  The 
right  of  property  cannot  be  rationally  questioned,  although 
many  people  who  attempt  to  carry  out  their  socialistic 
theory  and  deny  the  right  of  interest  in  order  to  maintain 
their  position  are  forced  to  deny  the  right  of  property 
in  their  attempt  to  defend  their  absurd  position. 

Monopoly  Privileges. 
There  are  however  certain  monopoly  privileges  granted 
by  the  state,  which  also  interfere  very  much  with  the 
distribution  of  wealth.  These  are  generally  in  the  form 
of  patent  rights,  copyrights,  trade-marks,  and  franchises. 
They  are  sometimes  called  artificial  monopolies,  because 
they  are  created  by  the  state.  They  are  not  a  source  of 
wealth  or  a  means  of  production,  but  merely  an  exclusive 
control  given  by  the  government  over  a  certain  enterprise, 
the  entire  profits  of  which  may  be  directed  into  the  hands 
of  one  who  owns  the  right  or  privilege.  But  as  these 
may  be  bought  and  sold,  from  the  personal  standpoint  of 
the  distribution  of  wealth  they  are  property  rights. 


ECONOMICS.  161 

There  is  another  group  of  monopolies,  that  arise  out 
of  the  condition  of  modern  industrial  society.  These  are 
sometimes  called  natural  monopolies,  because  the  monopoly 
power  arises  out  of  economic  conditions ;  although  the 
line  of  division  is  not  strongly  marked  between  them  and 
artificial  monopolies,  for  indeed  every  natural  monopoly 
receives  the  sanction  of  the  government  by  the  means  of 
a  franchise  which  makes  it  rely  in  part  upon  the  state 
for  its  existence.  Land,  in  so  far  as  it  is  a  monopoly, 
beloiigs  to  this  class,  and  such  great  enterprises  as  rail- 
ways, water- works,  tramways,  gas-works,  telegraphs,  etc., 
are  classified  in  this  group.  Also,  the  modern  manufac- 
turing industries  which  have  grown  into  gigantic  corpora- 
tions and  trusts  have  derived  such  a  momentum  of  power 
and  mastery  over  conditions  as  to  be  practically  monopo- 
lies. Summing  up  a  review  of  natural  and  artificial 
monopolies,  Mr.  J.  E.  Commons,  in  his  book  on  The  Dis- 
tribution of  Wealth,  enumerates  the  following  proposi- 
tions : 

1.  They  are  not  capital,  but  exclusive  privileges  of  sell- 
ing goods  and  services.  This  privilege  is  of  paramount 
importance  in  modern  society,  where  goods  are  produced, 
not  for  direct  consumption  by  the  producers,  but  for  sale 
and  profit. 

2.  They  fur*nish  opportunities  for  the  profitable  in- 
vestment of  labor  and  capital. 

3.  Their  value  consists  in  the  power  they  give  to  limit 
the  supply  of  their  produce  relatively  to  the  demand 
for  it. 

4.  They  may  be  united  in  more  or  less  complicated 
combinations  in  single  enterprises.  A  railway,  for  ex- 
ample, may  possess  monopoly  advantages  due  to  patents, 
franchises,  land,  and  good-will. 


152 


ECONOMICS. 


5.  They  are,  like  capital,  the  objects  of  the  rights  of 
property,  and  may  therefore  be  subject  to  full  and  partial 
ownership.  In  the  case  of  artificial  monopolies,  the  gov- 
ernment creates  the  monopoly  privilege,  and  then  assigns 
it  to  individuals,  who  may  transfer  it  by  deed  or  other- 
wise. But  in  the  case  of  natural  monopolies,  the  monopoly 
privilege  arises  simply  by  virtue  of  private  property  in 
a  certain  peculiar  kind  of  material  object. 

6.  Good-will  is  partly  a  natural  and  partly  an  artificial 
monopoly.  It  originates  in  the  fact  of  private  property 
in  material  objects,  such  as  a  retail  store  or  manufacturing 
enterprise.  In  order  that  this  may  be  done,  the  law  must 
make  it  an  artificial  monopoly.  It  does  this,  not  by  form- 
ally creating  a  monopoly  privilege,  but  by  enforcing  the 
private  contract  of  the  seller  not  to  engage  in  the  same 
occupation,  according  to  the  terms  of  the  contract. 

7.  The  public,  as  well  as  individuals,  may  be  the  owner 
of  land,  capital,  and  monopoly  privileges.  The  state,  in 
its  various  divisions,  is  a  legal  person,  and  as  such  is  a 
subject  of  the  same  rights  as  private  persons.  This  in- 
cludes full  ownership,  which  may  be  the  ownership  simply 
of  material  objects,  as  a  postoffice  building;  or  the  owner- 
ship of  natural  or  legal  monopoly,  such  as  water-works, 
streets,  and  the  postoffice  business ;  i.  e.,  the  exclusive  right 
to  supply  water,  maintain  streets,  and  carry  the  mails. 

References:  Commons,  J.  R.,  The  Distribution  of  Wealth; 
Thompson,  H.  M.,  The  Theory  of  Wages;  Nicholson,  J.  S.,  The 
Principles  of  Political  Economy;  Hadley,  A.  T.,  Economics; 
Marshall,  Alfred,  Principles  of  Political  Economy ;  Hobson,  John  A., 
The  Economics  of  Distribution;  Clark,  J.  B.,  The  Distribution  of 
Wealth;  Carver,  T.  N.,  The  Distribution  of  Wealth. 


ECONOMICS.  153 


CHAPTEE  II. 

KENT  AS  A  FACTOR  IN  DISTRIBUTION. 

Kent  in  General. 

Eent  is  called  the  normal  return  of  land.  Kicardo 
asserted  that  it  arose  from  the  natural  and  indestructible 
qualities  of  the  soil;  and  this  definition  is  quite  correct 
fundamentally,  for  rent  arises  from  the  use  of  the  ground 
alone.  As  Ely  says,  "  The  rent  of  land  is  the  annual  re- 
turn of  land  itself  " ;  or,  as  Walker  says,  "  Rent  is  the 
surplus  of  the  crop  above  the  cost  of  cultivation  on  the 
least  productive  lands  contributing  to  the  supply  of  the 
market."  Marshall  says :  "  The  rent  of  a  piece  of  land  is 
the  excess  of  its  produce  over  the  produce  of  an  adjacent 
piece  of  land  which  is  cultivated  with  an  equal  amount 
of  capital,  and  which  would  not  be  cultivated  at  all  if 
rent  were  demanded  for  it."  And  Marshall  continues  to 
say  that  "the  economic  rent  of  a  piece  of  land  is  found  by 
subtracting  from  the  value  of  the  annual  produce  an 
amount  sufficient  to  return  the  former  outlay  with  profits." 
These  are  only  different  methods  of  expressing  the  nature 
of  rent.  Andrews  extends  the  principle  of  rent  to  general 
monopoly,  and  says :  "  Eent  in  its  broadest  sense  is  any 
kind  of  gain  arising  from  monopoly,  whether  in  land, 
capital,  or  talent-income,  which  falls  to  any  productive 
agency  simply  because  of  its  rarity." 

Contract  Bent  and  Economic  Bent. 

It  is  necessary  to  distinguish  between  ordinary  con- 
tract or  market  rent  and  economic  rent.    A  person  enters 


154  ECONOMICS. 

into  a  contract  to  pay  the  owner  of  land  a  certain  fixed 
annual  sum  for  the  use  of  the  land.  For  this  sum  the 
tenant  has  the  use  of  the  land,  buildings,  ground  on  which 
they  stand,  and  all  improvements.  The  sum  which  he 
pays  is  composed  of  two  chief  elements, — one  the  payment 
for  the  use  of  capital  invested  in  improvements,  and  the 
other  for  the  use  of  land  itself.  A  piece  of  unimproved 
property  adjoining,  of  the  same  grade  as  the  improved 
land,  rents  for  much  less,  which  is  probably  the  normal 
rent.  However,  it  may  be  possible  that  in  making  the 
contract, — on  account  of  ignorance,  or  a  sudden  excessive 
demand  for  land,  or  the  pressure  of  custom  in  charging 
high  rents, — the  individual  may  have  paid  too  much,  or 
more  than  the  real  rent  of  the  land  alone,  known  as  eco- 
nomic rent  in  the  principal  works  of  political  economy. 
A  very  good  illustration  of  this  economic  rent  is  seen 
in  cities  such  as  Baltimore  and  Philadelphia,  where  the 
rent  of  the  land  is  different  from  the  rent  of  the  house 
which  stands  on  it.  A  person  may  own  the  house  but  not 
own  the  land,  and  thus  pay  rent  for  the  land  on  which 
his  house  stands, — ^which  would  be  considered  as  economic 

rent. 

Cause  of  Bent. 

Rent  arises  from  two  fundamental  conditions  of  land: 
first,  that  of  fertility;  and  second,  that  of  position  or 
location.  These  two  usually  work  in  conjunction,  and  the 
difference  of  position  more  frequently  than  the  difference 
of  fertility  represents  the  chief  factor  in  determining 
rent  in  towits  and  cities;  while  in  rural  districts  fertility 
of  soil  is  a  more  important  factor.*  Lands  that  are  favor- 
ably located  yield  a  larger  return  than  those  less  favor- 

*  In  case  of  ground  rents  of  town  lots  fertility  does  not  enter  into  the  cause  of  rent, 
it  being  determined  by  position  alone. 


ECOIirOMICS. 


155 


ably  situated,  and  lands  having  a  fertile  soil  which  yields 
a  large  product,  yield  a  higher  rent  than  poorer  land. 
'As  the  first  use  of  the  soil  is  tillage,  it  would  appear 
that  the  difference  in  fertility  would  be  the  first  causa; 
but  as  location  respecting  the  market  lessens  cost  of  trans- 
portation, the  position  of  farm  lands  has  much  to  do 
with  their  market  rent.  In  determining  rent.  Walker 
insists  on  the  consideration  of  fertility  as  the  real  cause 

of  rent. 

Manner  in  which  Bent  Arises. 

Suppose  there  are  several  tracts  of  land  in  the  same 
market,  and  that  there  is  private  ownership  of  land  and 
competition  in  its  use.  Eliminate  all  personal  influences 
save  the  desire  to  obtain  the  largest  return  for  a  given 
sacrifice  of  capital  and  labor  on  the  part  of  both  landlord 
and  tenant.  Of  the  tracts  of  land  A,  B,  C,  and  D,  which 
are  enumerated  in  the  order  of  their  fertility,  D  yields 
just  enough  product  to  pay  for  the  cost  of  cultivation; 
that  is,  the  wages  of  labor,  interest  on  capital  invested, 
and  remuneration  for  managing  ability.  Let  us  fix  this 
yield  at  ten  bushels  per  acre.  It  costs  no  more  to  cultivate 
the  tract  C  of  more  fertile  soil  than  the  tract  D,  hence 
the  expenses  per  acre  will  be  the  same.  Suppose  now 
that  C  yields  fifteen  bushels  per  acre,  it  is  evident  that 
the  five  bushels  represent  a  clear  gain  on  account  of  extra 
fertility.  So,  if  B  yields  twenty  and  A  twenty-five,  it  is 
evident  that  the  rent  is  respectively  ten  and  fifteen  bushels 
per  acre.  Should  the  prices  of  products  rise  so  as  to 
make  an  increased  demand,  then  other  and  less  fertile 
lands  than  D  may  be  brought  into  use  to  supply  the 
market,  and  rent  will  appear  in  the  tract  D,  for  it  will 


156 


ECONOMICS. 


take  fewer  bushels  to  pay  the  cost  of  cultivation.  On  the 
contrary,  if  prices  should  fall  to  any  great  extent,  C  will 
no  longer  pay  rent,  but  go  out  of  cultivation  unless  it  can 
be  used  for  some  other  purpose  to  sufficient  advantage  to 
pay  rent  or  cost  of  service.    (See  diagram  H,  fig.  1.) 

DIAGRAM  H. 


Figure  1. 


25  bu. 

20  bu. 

15  bu. 

10  bu. 

A 

B 

0 

D 

Rent,  15  bu. 

Rent,  10  bu. 

Rent,  5  bu. 

Figure  2. 


Figure  S, 


ECONOMICS.  157 

Should  there  be  discovered  a  large  tract  of  fertile  land 
E,  which  would  yield  a  return  equal  to  C,  D  would  go 
out  of  cultivation  if  the  fertile  tracts  could  supply  the 
markets,  otherwise  D  would  be  worked  at  cost.  The  open- 
ing up  of  the  fertile  lands  of  the  Mississippi  valley  and 
the  far  West  caused  less  fertile  lands  in  New  England 
to  go  out  of  cultivation,  or  to  be  used  for  pasturage,  in 
which  they  paid  expenses  or  else  yielded  a  small  rent. 
(See  diagram  H,  fig.  2.) 

Difference  in  the  Fertility  of  Soil. 

As  rent  rises  chiefly  from  the  difference  of  the  fertility 
of  soil,  it  is  evident  wherever  land  is  in  cultivation. 
Thus,  suppose  a  farmer  has  a  tract  of  four  hundred  acres 
of  land  which  is  divided  into  four  different  tracts  of  an 
equal  fertility.  The  most  fertile  lands  are  cultivated 
first.  If  the  returns  from  agriculture  are  sufiicient,  the 
lands  in  the  second  grade  of  fertility  will  be  cultivated; 
and  if  prices  continue  to  rise,  the  farmer  may  continue 
to  increase  the  area  of  cultivation  until  the  entire  tract  is 
cultivated.  Here,  as  above,  rent  rises  in  the  first  instance 
out  of  the  differences  of  fertility  of  the  land. 

Favorable  Location. 

But  if  land  were  all  of  the  same  degree  of  fertility,  its 
difference  in  location  would  have  a  tendency  to  develop 
rent.  Now  it  is  impossible  to  equalize  the  location  of 
land,  whether  it  be  agricultural  land  or  city  property, 
for  the  desirability  of  location  will  always  be  observed, 
even  in  the  taking  up  of  new  lands  in  a  large  valley. 
Usually,  the  first  located  hasi  a  value  superior  to  the 
Becond,  not  only  on  account  of  fertility,  but  also  of  loca- 


158 


ECONOMICS. 


tion.  Tlie  ground  rent  which  arises  in  cities  is  entirely 
dependent  upon  location.  On  some  streets  we  find  rent 
reaching  fabulous  prices,  while  on  others  it  is  much  lower. 
The  farther  business  property  is  from  the  busy  center 
of  the  city,  the  cheaper  the  rent,  unless  it  should  be  taken 
from  valuable  residence  property ;  and  residence  property 
varies  in  value  likewise  as  it  recedes  from  the  desirable 
and  fashionable  residence  localities. 

Limited  Returns  to  Agriculture. 
Intensive  agriculture  tends  to  retard  the  process  of  tak- 
ing up  new  lands,  and  were  it  not  for  the  fact  that  land 
has  not  only  decreasing  but  limited  returns,  a  small  area 
would  tend  to  supply  all  the  demand  for  agricultural  prod- 
ucts; but  there  is  a  limit  to  which  agriculture  can  be  suc- 
cessfully continued  on  any  tract  of  land.  Indeed,  there 
is  a  point  to  be  reached  when  the  application  of  labor  and 
capital  will  yield  no  return  whatever.  The  tendency  to 
take  up  new  lands  does  not  always  proceed  with  regularity. 
In  the  first  place,  lands  are  not  taken  up  always  on  account 
of  their  immediate  economic  yield,  but  rather  are  secured 
as  an  investment.  Men  enter  a  new  territory  far  from 
the  market  and  take  up  lands  which  would  not  yield  any 
rent  at  all  or  even  pay  for  the  cultivation,  obtaining  only 
a  bare  subsistence  while  cultivation  is  carried  on,  with 
a  prospect  in  the  rise  of  the  price  of  land  somewhat  later. 
This  is  purely  a  business  investment,  and  nearly  all  the 
lands  of  the  West  have  been  secured  in  this  way.  It  is 
also  true  that  when  people  have  once  established  them- 
selves on  lands  they  do  not  abandon  them  for  more  fertile 
lands,  because  they  have  invested  capital  in  improvements 
and  they  hold  these  lands  even  after  they  pay  no  rent. 


ECONOMICS.  169 

Margin  of  CultiTration. 

That  land  which  will  just  pay  the  cost  of  cultivation 
and  no  more  is  said  to  be  on  the  margin  of  cultivation. 
(See  diagram  H.)  Lands  that  are  less  fertile  or  less 
favorably  situated  are  said  to  be  below  the  margin  of  culti- 
vation, and  will  not  be  occupied.  That  is,  land  that  will 
pay  wages  for  cultivation,  profits  for  management  and  in- 
terest on  capital  invested  will  be  occupied  and  cultivated^, 
while  land  that  fails  to  yield  this  return  will  not  be  cul- 
tivated. It  sometimes  happens,  however,  that  land  which 
will  not  be  used  for  agricultural  purposes  may  be  used 
for  other  purposes  and  thus  yield  a  rent,  or  at  least  pay 
for  the  cost  of  cultivation.  It  also  happens  that  land  is 
occupied  and  cultivated  by  persons  who  spend  partial  time 
upon  it,  using  the  remainder  for  some  other  purpose.  In 
such  cases,  land  that  would  pay  no  rent  for  agriculture 
might  yield  a  return  for  pasturage. 
Prices  and  Bent. 

An  increase  in  prices,  if  permanent  and  constant,  will 
tend  to  enlarge  the  agricultural  area ;  and  this  has  a  tend- 
ency to  increase  rent,  for,  as  it  costs  the  same  to  cultivate 
an  acre  of  poor  land  as  that  of  rich  land,  the  lower  the 
margin  of  cultivation  falls,  the  higher  will  be  the  rent, 
because  the  annual  return  on  the  fertile  lands  is  much 
increased,  and  the  difference  in  the  cost  of  cultivating 
the  poorest  land  occupied  and  the  returns  of  the  most 
fertile,  is  greatly  increased.  Consequently,  high  prices 
as  well  as  favorable  location  increase  rent,  simply  because 
high  prices  create  a  demand  for  land.  The  opposite  is 
true  in  the  case  of  fall  of  prices.  A  long,  persistent  fall 
in  prices  will  tend  to  diminish  the  demand  for  land, 


160 


ECONOMICS. 


which  will  cause  its  rent  to  fall.  This  must  be  taken 
as  a  general  law  which  is  interfered  with  by  various 
conditions  of  investment,  for  land  will  be  held  for  year 
after  year  when  local  interferences  cause  it  to  yield  no 
rent  or  indeed  to  fall  below  the  margin  of  cultivation^ 
simply  on  account  of  a  prospective  yield.  In  this  way  busi- 
ness is  tided  over  in  difficult  times  until  it  pays.  This, 
however,  does  not  interfere  with  the  law  of  rent,  for  in- 
deed were  there  no  margin  of  cultivation  except  in  theoryj 
the  fact  of  the  relative  fertility  of  land  and  the  difference 
in  the  desirability  of  location  would  be  sufficient  to  es- 
tablish the  law  of  rent. 

Rent  Does  Not  Enter  into  the  Cost  of  Production. 

It  is  assumed  that  the  market  price  of  an  article  is 
not  dependent  upon  the  rent  that  .is  paid,  but  rather 
that  rent  is  determined  by  the  market  price.  This  is 
logically  the  correct  view  to  take.  High  rents  do  not 
give  us  high  prices,  but  high  prices  make  high  rents.  It 
niight  be  well  to  inquire  carefully  into  the  real  nature 
of  this  statement,  to  see  what  is  meant.  When  Mr. 
Ricardo  enunciated  this  doctrine  he  talked  about  corn, 
as  if  all  kinds  of  produce  whatsoever  had  been  reduced 
to  one  kind.  If  this  could  be  true  it  would  be  actually 
certain  that  high  prices  would  give  us  high  rent  univer- 
sally, and  that  high  rents  have  nothing  to  do  with  high 
prices.  However,  there  is  an  indirect  way  in  which  high 
rents  may  make  high  prices.  Suppose  there  be  a  given 
number  of  acres  of  wheat  land  and  a  given  number  of 
acres  of  corn  land.  If  the  price  of  wheat  should  rise 
until  the  wheat  land  was  not  sufficient  to  supply  the  de- 
mands, they  might  encroach  upon  the  corn  lands  and  thus 


ECONOMICS. 


161 


create  a  deficiency  in  the  corn  crop, — for  wheat  would 
raise  the  price  of  corn.  That  is,  the  high  rent  of  land  for 
wheat  might  cause  high  prices  for  corn.  To  find  out  just 
what  is  meant  by  this  in  a  practical  sense,  let  us  take  the 
case  of  the  mineral  springs.  (See  MarshalFs  Principles 
of  Economics,  Bk.  VI,  ch.  2.)  Let  us  suppose  of  a  series 
of  mineral  springs  that  they  are  all  owned  by  different 
individuals;  that  they  furnish  a  natural  mineral  water 
which  finds  a  market,  and  for  which  there  is  no  available 
substitute.  There  is  a  free  competition  in  both  buying 
and  selling.  Suppose  that  the  supply  that  is  drawn  from 
each  of  them  can  be  increased  indefinitely  by  pumping^ 
but  that  the  expense  of  this  increases  in  proportion  to 
the  additional  supplies  to  be  obtained  by  this  process. 
The  owner  of  each  spring  will  go  on  increasing  his  produc- 
tion until  the  price  of  water  no  longer  covers  more  than 
the  expense  of  an  additional  supply.  That  is,  the  last 
gallon  of  water  which  the  expenditure  enables  him  to 
raise  when  the  amount  raised  by  the  whole  number  of 
springs  is  just  sufiicient  to  meet  the  market,  will  be  pro- 
duced at  an  equilibrium  price  which  will  just  pay  for 
its  own  production.  The  rental  value  of  each  spring  now 
will  be  the  excess  which  this  price  affords  over  the  expenses 
of  working  it.  That  is,  demand  and  supply  here  as  before 
regulate  the  price,  but  will  not  enter  into  the  expenses  of 
production.  But  suppose,  now,  that  the  land  occupied 
by  one  of  these  springs  is  more  desirable  for  a  building 
site,  and  some  person  should  build  upon  it  and  thus  de- 
crease the  supply  of  water.  Immediately,  as  the  water- 
supply  is  contracted,  the  demand  for  the  water  is  relatively 
greater  than  the  supply,  and  the  price  rises.  Consequently 
—11 


162 


ECONOMICS. 


the  high  rent  of  the  ground  used  for  some  other  purpose 
increases  the  price  of  the  commodity  in  the  market.  With 
reference  to  agricultural  products  taken  as  a  whole,  the 
law  that  rent  does  not  enter  into  the  cost  of  production 
obtains.  But,  if  there  be  a  certain  amount  of  land  which 
can  be  used  for  the  purpose  of  raising  wheat  and  a  certain 
amount  that  can  be  used  for  corn,  suppose  an  increased 
demand  for  corn  should  raise  the  price  of  that  commodity 
so  that  it  would  encroach  upon  the  wheat  land,  taking 
a  part  of  it ;  immediately  now,  supposing  the  demand  for 
wheat  be  constant,  the  demand  will  be  greater  than  the 
supply,  and  the  price  will  rise  on  account  of  the  excessive 
rent  arising  from  the  corn  land,  which  has  therefore  en- 
croached upon  the  wheat  land. 

Bent  and  Free  Land. 
The  principles  of  rent  as  enunciated  above  represent 
the  result  of  free  land.  So  long  as  there  are  lands  to  be 
taken  up,  the  principle  of  rent  is  easily  determined.  There 
must  be  a  time,  however,  when  all  of  the  free  land  will 
be  taken  which,  under  any  ordinary  circumstances,  can 
be  used  at  all.  As  the  margin  of  cultivation  falls  under 
free  lands,  rent  absorbs  more  and  more  of  the  entire 
product;  and  as  the  rent  increases,  the  margin  of  free 
productivity  continues  to  decrease,  because  lands  of  lower 
grade  can  be  used.  When  landlordism  prevails  and  the 
owner  of  the  land  fails  to  cultivate,  but  lets  it  out  to  ten- 
ants, the  land  will  yield  no  rent  in  the  lowest  scale  of  pro- 
duction. There  is  a  continual  absorption  of  the  entire 
product  until  rent  meets  wages,  and  then  there  is  a  check. 
The  rent  of  land  arises  whether  land  is  free  or  unfree; 
there  is  no  difference  in  this  respect  so  far  as  the  principle 
of  rent  is  concerned. 


ECONOMICS.  163 

Economic  Significance  of  Bent. 
Rent  must  always  be  allowed  for  in  any  financial  calcu- 
lation whatever.  The  constant  increase  in  rent  in  propor- 
tion to  the  returns  from  agriculture  has  alarmed  some 
people,  who  seem  to  believe  that  rent  eventually  will  ab- 
sorb the  entire  product.  Fortunately,  in  our  own  country 
sixty-five  per  cent,  of  the  farms  are  still  owned  by  those 
who  work  them,  and  whatever  increment  of  rent  arises 
goes  to  the  owner. 

References:  Walker,  F.  A.,  Land  and  Its  Rent;  Clark,  J.  B., 
Capital  and  Its  Earnings;  Commons,  J.  R.,  The  Distribution  of 
Wealth;  Ricardo,  D.,  Principles  of  Political  Economy;  Patten, 
Simon  N.,  The  Premises  of  Political  Economy. 


164 


ECONOMICS. 


CHAPTEK   III. 

WAGES  AS  A  FACTOR  IN  DISTRIBUTION. 

Labor  the  Cause  of  Wages. 
When  we  speak  of  wages  in  the  scientific  sense,  we 
mean  the  earnings  of  common  labor;  all  high  fees  and 
salaries  should  be  excluded.  The  rewards  earned  bj 
peculiar  talents,  education,  or  training,  are  sometimes 
classified  along  with  profits.  However,  the  line  must  not 
be  drawn  too  closely  when  we  consider  the  general  subject 
of  wages,  for  in  a  general  sense  it  is  payment  for  services 
rendered.  The  salary  of  a  railroad  president  at  $25,000 
a  year  is  a  return  for  services.  But  the  wages  question 
scientifically  considered  should  not  include  such  a  salary 
as  wages.  But  labor  is  the  cause  of  wages.  The  payment 
for  the  services  rendered  by  the  combined  action  of  body 
and  brains  is  wages.  They  are  earned  by  the  laborer. 
He  earns  his  own  wages  each  day  he  labors,  and  when  he 
ceases  to  do  this  he  is  not  employed.  Hence  it  is  some- 
times said  that  the  laborer  pays  his  own  wages. 

Pure  Wages  Distinguished  from  Gross  Wages.  • 

The  return  to  common  labor  is  called  pure  wages,  which 
should  be  distinguished  from  gross  wages,  which  might 
include  extra  rewards  and  services. 

Real  and  Nominal  Wages. 
Economic  wages  are  real  wages,  not  nominal.     By  real 
wages  is  meant  the  purchasing  power  of  a  day's  labor; 
by    nominal    wages    the    amount    received    in    currency. 


ECONOMICS. 


165 


A  man  may  be  receiving  two  dollars  a  day  in  one  country 
and  for  the  same  service  a  man  receives  one  dollar  in 
another,  yet  they  may  have  the  same  real  wages;  for  it 
is  possible  that  the  man  who  receives  a  dollar  a  day  buys 
the  same  articles  for  a  dollar  that  would  cost  the  other 
man  two  dollars.  The  real  wages  in  different  countries 
do  not  vary  so  much  as  the  nominal  wages,  hence  people 
in  making  comparisons  of  wages  frequently  omit  to  prop- 
erly distinguish  between  real  and  nominal  wages. 

Wage-Fund  Theory. 
Some  of  the  older  economists  held  that  there  was  a 
certain  sum,  a  part  of  capital,  set  aside  for  the  payment 
of  wages,  and  when  this  sum  was  exhausted  no  more 
laborers  could  be  hired  until  it  was  replaced.  This  wage 
fund  was  continually  growing  as  economic  society  and 
wealth  accumulated,  and  the  number  of  laborers  that 
might  be  employed  was  limited  by  this  fund.  Accepting 
this  theory,  it  was  an  easy  manner  to  determine  the  rate 
of  wages  by  simply  dividing  the  amount  of  the  wage  fund 
by  the  number  of  laborers.  This  method  would  set  a  limit 
upon  the  rate  of  wages  to  be  paid.  Mr.  Mill  advocated 
this  doctrine  in  his  earlier  years,  but  abandoned  it  some- 
what later.  The  fact  is  that  the  source  of  wages  is  the 
earnings  of  the  wage-earner,  a.nd  the  wages  come  out  of 
the  product  w^hich  he  makes  every  day.  Instead  of  giv- 
ing him  his  share  of  the  product  at  night  or  at  the  close 
of  the  week,  the  employer  advances  in  the  form  of  money 
the  laborer's  wages  each  day  or  each  week.  Of  course  in  the 
wages  system  the  rate  is  determined  by  the  employer  and 
laborer  by  contract  before  the  labor  begins.  But  when  the 
laborer's  earnings  will  no  longer  pay  for  his  wages  he 


166  ECONOMICS. 

will  cease  to  be  employed.  There  is  a  point  at  which 
the  wage-fund  theory  and  the  labor  theory  practically 
coincide,  for  wages  are  limited  by  capital.  The  amount 
of  capital  seeking  investment  by  way  of  buildings,  machin- 
ery, etc.,  determines  the  number  of  laborers  to  be  em- 
ployed, and  hence  fixes  the  rate  of  wages.  If  capital  is 
not  available,  laborers  will  not  be  employed.  On  the  other 
hand,  if  laborers  are  thrown  on  the  market  they  will  tend 
to  decrease  wages  by  competition,  and  the  capital  under 
such  circumstances  indirectly  determines  the  rate.  'Now 
the  wage-fund  theory  supposes  that  a  certain  sum  is  set 
apart  for  the  payment  of  wages,  and  that  no  more  laborers 
can  be  employed  until  this  is  replaced.  If  we  consider 
this  replacement  working  at  a  rapid  rate,  it  simply  asserts 
that  capital  limits  wages.  However,  there  is  a  wide  dis- 
tinction in  theory,  for  in  the  economic  sense  wages  must 
come  out  of  the  earnings  of  labor  instead  of  being  paid 
out  of  the  surplus  of  capital,  which  is  used  for  other 
purposes.  The  point  of  view  is  entirely  different,  and 
the  different  results  are  of  great  importance  in  the  theory 

of  wages. 

Determination  of  the  Bate  of  Wages. 

There  are  various  theories  of  wages.  Some  workmen 
and  certain  philosophers  are  always  demanding  the  whole 
of  the  product  for  the  laborer.  They  hold  that  the  men 
who  create  the  goods  have  the  use  of  them.  They  imagine 
that  gains  are  obtained  by  capital  in  an  unjust  way^ 
but  are  in  error  because  they  fail  to  recognize  that  capital 
performs  any  service  whatever.  Those  laborers  who  at- 
tempt to  break  down  the  wage  system  by  methods  of 
cooperation  are  the  first  to  learn  that  capital  is  necessary 
to  carry  on  any  business  whatever.     Generally  speaking, 


ECONOMICS.  167 

the  rate  of  wages  is  determined  by  supply  and  demand. 
The  more  laborers  in  the  market,  the  demand  remaining 
the  same,  the  lower  will  wages  be.  This  is  the  general 
theory  underlying  the  whole  system  of  wages,  although 
it  is  true  that  wages  may  be  reduced  to  a  more  specific 
theory,  which  will  be  determined  hereafter. 

Besidual-Claimant  Theory. 

One  of  the  commonest  theories  for  determining  the 
rate  of  wages  is  generally  known  as  the  residual- 
claimant  theory.  It  has  been  advocated  by  Professor 
Walker  and  other  able  economists.  It  holds  that  the  net 
product  of  industry  divides  itself  into  rent,  profits,  wages, 
and  interest.  That  when  rent,  profits  and  interest  are 
satisfied,  wages  take  what  is  left.  When  asked  if  this 
is  true  why  the  amount  of  wages  is  so  small,  it  is  replied 
that  by  some  power  of  capital  or  managing  ability  a  large 
proportion  of  income  has  been  directed  away  from  its 
natural  source  which  would  otherwise  have  fallen  naturally 
to  labor.  In  reality  there  is  no  residual  claimant  in  distri- 
bution. Wages  are  a  variable  proportion  of  a  variable 
product,  and  so  for  rent  and  interest, — ^both  being  variable 
proportions  of  variable  products.  While  the  net  product  is 
distributed  between  rent,  wages,  interest,  and  profits,  the 
proportion  upon  which  it  is  divided  does  not  depend  upon 
the  residual-claimant  theory,  but  rather  upon  the  value- 
creating  power  of  each  factor  in  production,  and  this 
throws  it  all  in  the  province  of  supply  and  demand. 

Iron  Law  of  Wages. 
In  attempting  to  ascertain  whether  there  is  a  natural 
law  of  wages,  Turgot  announced  that  ^'in  every  kind  of 
labor  the  workman's  wages  must  fall  to  a  level  solely  de- 


168  ECONOMICS. 

termined  by  the  necessities  of  existence.'^  J.  B.  Say  and 
Ricardo  somewhat  later  used  almost  the  same  words ;  and 
the  socialists,  taking  up  the  idea,  expanded  and  empha- 
sized it.  This  is  what  is  known  as  the  iron  law  of  wages, 
or,  as  it  is  sometimes  called,  the  brass  law.  It  means 
that  wages  must  be  regulated  by  the  value  that  is  abso- 
lutely necessary  for  the  support  of  the  laborer  and  his 
family.  There  must  be  sufficient  to  give  food,  shelter, 
and  protection;  to  keep  up  repairs,  so  to  speak;  and  to 
replace  the  laborer  with  another  when  he  wears  out.  This 
means  that  the  Chinaman  living  upon  rice  and  with  small 
amount  of  clothing  and  little  protection  receives  wages 
accordingly,  and  that  the  American  laborer  who  reduces 
his  style  of  life  to  the  same  condition  must  likewise  live 
upon  a  few  cents  a  day.  The  law  as  a  law  is  not  true, 
though  it  does  show  a  tendency  in  determining  the  rate 
of  wages.  If  we  take  it  that  the  workman's  wages  will 
never  rise  above  what  he  absolutely  requires  to  live  upon, 
the  facts  in  the  case  overthrow  it.  For  different  kinds  of 
work  receive  different  wages ;  also,  different  wages  for  the 
same  work  are  paid  in  different  countries.  But,  says  one, 
this  rate  of  living  is  taken  according  to  the  standard  of 
life  that  it  is  necessary  for  him  to  maintain.  If  this  be 
true,  then  the  law  of  wages  is  not  such  a  terrible  thing 
as  it  appears  to  be.  If  it  means  that  laborers  are  ground 
down  to  the  bare  necessaries  of  human  existence,  and 
that  the  normal  rate  of  wages  is  just  sufficient  to 
sustain  life  and  reproduce  their  kind  under  the  most 
favorable  circumstance,  the  law  is  not  true.  But  in  a 
broad  sense  the  theory  is  more  or  less  true,  for  wages 
must  sustain  life  or  work  ceases.  On  the  other  hand, 
there  is  a  point  beyond  which  wages  cannot  rise  without 


ECONOMICS. 


169 


discouraging  business  operations.  Between  these  two 
points,  the  upper  and  the  lower,  are  developed  the  real 
scientific  laws  of  wages. 

Scientific  Law  of  Wages. 
If  we  consider  the  various  industries  in  every  line  ()f 
work,  it  will  be  seen  that  the  natural  or  normal  rate  of 
wages  is  determined  by  the  lowest  grade  of  industry  in 
any  given  line.  As  it  has  been  stated,  "general  wages 
tend  to  equal  the  last  actual  product  by  the  last  laborer 
that  is  added  to  the  social  working  force."  This  is  es- 
tablished on  the  principle  that  when  labor  will  pay  for 
itself,  it  will  be  employed;  if  not,  no  labor  will  be  em- 
ployed. In  this  respect  it  has  a  resemblance  to  the  law 
of  rent  and  profits.  It  w^ould  not  be  proper  to  insist 
that  the  normal  rate  of  wages  is  caused  by  this  business 
on  the  margin  of  profits,  but  that  the  natural  or  normal 
rate  of  wages  is  indicated  at  this  point.  It  is  merely  a 
process  of  excluding  more  complex  elements  and  return- 
ing to  the  simplest  phase  of  industry  in  order  to  allow 
wages  to  stand  alone.  If  this  indicates  the  normal  rate 
of  wages,  other  more  prosperous  industries,  or  those  de- 
manding greater  skill,  might  return  a  larger  amount  in 
the  form  of  wages.  The  normal  rate  of  wages  could  be 
determined  in  no  other  way,  although  competition  in 
the  labor  market  brings  wages  to  a  general  level  in  dif- 
ferent groups. 

Competing  Groups. 

There  are  everywhere  low-pressure  and  high-pressure 
competitive  groups  of  labor.  Thus,  in  the  iron  industry 
we  find  competition  of  groups  of  miners,  smelters,  pud- 
dlers,   etc.      In  the  machine-shop  there  are   competitive 


ITO  ECONOMICS. 

groups  of  men  in  specialized  occupations.  So  in  the 
woolen  industry, — the  general  competition  of  all  laborers 
employed  and  a  special  competition  among  those  especially 
prepared  for  a  given  service.  Also,  it  appears  that  in 
the  division  of  labor  originally,  these  groups  were  formed 
because  each  laborer  had  a  special  occupation.  As  the 
division  of  labor  becomes  excessive,  we  find  the  tendency 
for  labor  to  become  more  mobile.  That  is,  as  it  takes 
but  little  time  for  a  person  to  learn  one  thing,  he  may 
pass  more  readily  from  one  industry  to  another;  thus 
the  barriers  between  industries  appear  to  be  broken  down : 
yet  there  are  other  things  that  interfere  with  the  mobility 
of  labor.  The  specialization,  requiring  greater  skill  before 
confidence  is  established,  and  also  the  fact  that  through 
labor  unions  and  methods  of  business,  employers  are  not 
willing  to  take  up  with  persons  who  have  left  one  industry 
to  enter  another,  make  it  quite  difficult  to  render  labor 
mobile.  Should  a  scarcity  of  labor  appear,  then  it  would 
be  easier  for  labor  to  shift  from  one  occupation  to  another. 
The  result  of  competition  in  the  high-pressure  group  is 
to  turn  the  surplus  labor  of  some  groups  into  others,  and 
to  turn  the  surplus  of  all  groups  into  the  unskilled  labor 
group,  which  makes  up  the  rank  and  file  of  the  unemployed. 
Wages  thus  are  subject  to  a  general  law  of  competition 
of  all  laborers,  and  a  special  law  of  special  groups. 
Influence  of  Labor  Organizations  on  Wages. 
The  influence  of  labor  organizations  on  wages  is  a  dis- 
puted point  among  economic  writers.  That  labor  organiza- 
tions have  had  at  least  a  general  influence  on  wages,  cannot 
be  denied.  In  so  far  as  they  have  been  successful  in  limit- 
ing the  supply  of  labor  in  a  given  field,  they  have  sue- 


ECONOMICS. 


171 


ceeded  in  raising  the  rate  of  wages.  In  so  far  as  thej 
have  created  monopoly  of  labor,  they  have  developed  a 
monopoly  of  wages.  Yet  it  will  be  found  that  their 
greatest  influence  has  been  in  agitation,  in  creating  a 
demand  for  higher  wages,  and  in  strikes  which  have 
resulted  in  forcing  employers  to  pay  a  fair  rate  or  what 
the  business  would  allow.  While  fundamentally  the  great 
law  of  supply  and  demand  must  regulate  general  wages, 
it  cannot  be  denied  that  the  influence  of  labor  organiza- 
tions has  done  considerable  in  keeping  up  the  rate  of 
wages.  Yet  it  must  be  conceded  while  they  have  advanced 
wages,  they  have  contributed  somewhat  to  the  army  of 
the  unemployed  by  making  it  unprofitable  to  carry  on 
certain  industries  at  the  high  wages  demanded.  Their 
influence  on  wages  from  the  direct  standpoint  of  monopoly 
has  been  of  a  somewhat  temporary  nature;  while  their 
influence  by  creating  a  higher  standard  of  life  and  by 
educating  public  sentiment  through  agitation  and  strikes 
has  tended  to  hold  up  wages. 

Business  Sense  and  Wages. 
An  important  cause  of  the  increase  in  wages  has  been 
the  business  sense  of  employers.  For  instance,  in  the 
care  of  horses  two  theories  have  been  advocated,  viz. : 
that  to  work  a  horse  very  hard  and  get  all  you  can  out 
of  him  in  a  short  time  is  economy;  to  feed  him  well, 
care  for  him  properly  and  make  him  last  longer  is  best 
economy.  The  same  theories  were  advocated  in  regard  to 
slave  labor.  If  horses,  mules  and  slaves  yield  a  larger 
return  by  excessive  toil,  which  shortens  life  and  gradually 
lessens  labor-power,  it  is  not  so  true  of  labor.  A  laborer 
well  fed  and  well  cared  for  will  do  more  work  and  better 


172 


ECONOMICS. 


work  for  the  employer  than  one  Avho  is  poorly  fed  and 
poorly  cared  for.  Hence  it  is  best  for  the  employer  to 
look  after  the  welfare  of  his  laborers,  and  it  is  not  best 
for  the  employer  to  have  a  grinding  rate  of  wages  for  the 
laborer.  Many  men  have  seen  this,  and  have  advanced 
their  own  interest  by  taking  good  care  of  the  laborers, 
making  them  capable  of  earning  a  high  rate  of  wages, 
keeping  them  contented  and  happy,  so  that  they  are  will- 
ing to  earn  the  wages  and  to  interest  themselves  in  their 
employer's  work;  and  finally,  by  paying  a  high  rate  of 
wages.  Thus  we  find  that  business  sense  has  been  looking 
out  for  the  laborer,  and  has  tended  to  keep  up  wholesome 
sentiment  in  favor  of  higher  wages. 

Philanthropy  and  Wages. 

Sentiment  has  much  to  do  with  economic  relations,  and 
a  well-administered  philanthropy  has  a  tendency  to  create 
an  interest  in  the  laboring  population  and  promote  ad- 
vocacy of  higher  wages.  Yet  it  will  be  found  that  all 
permanent  movements  in  this  respect  are  based  upon  busi- 
ness relations  and  rest  upon  a  business  basis.  The  agitation 
for  higher  wages  in  behalf  of  labor,  although  resting  on  an 
economic  basis,  has  its  influence  in  raising  wages. 

Eight-Hour  Day  and  Its  Effect  on  Wages. 
It  is  thought  by  many  laborers  that  if  the  eight-hour 
day  should  obtain,  wages  would  remain  the  same  for 
shorter  hours.  Others  hold  that  it  would  give  means  for 
employment  to  a  large  number  of  laborers.  In  fact,  the 
eight-hour  day  in  some  industries  would  earn  as  high  wages 
as  the  ten,  while  in  others  it  would  fall  much  short.  The 
decrease  in  the  number  of  hours  of  labor  in  general  would 
yield  a  relatively  large  return  of  wages  per  hour  and  a 


ECONOMICS. 


173 


smaller  return  per  day.  Possibly  with  the  general  adjust- 
ments of  industry,  wages  would  remain  the  same  for  an 
eight-hour  day  as  for  a  ten.  Wherever  the  day  has 
been  shortened  to  labor  the  appalling  effects  which  are 
generally  pointed  out  in  prospect  have  never  appeared. 
The  increase  in  wages  has  kept  its  pace  notwithstanding 
the  decrease  in  hours. 

Gradual  Increase  in  Wages. 
One  of  the  most  striking  phases  of  modern  economic  life 
is  the  constant  increase  in  wages.  This  of  course  has 
varied  on  account  of  local  disturbances  and  periods  of 
depression,  while  as  a  rule  there  has  been  a  persistent 
rise.  In  looking  over  the  advance  in  wages  in  the  United 
States  during  the  past  fifty  years,  it  will  be  found  that 
the  rate  of  wages  was  very  low  when  we  had  a  high  infla- 
tion of  currency.  This  was  caused  by '  the  difference  be- 
tween nominal  and  real  wages.  It  is  an  illustration  of 
the  principle  that  in  all  movements  of  money  involving 
the  rise  or  fall  of  prices,  wages  are  the  first  to  be  affected 
in  the  fall  and  the  last  to  be  affected  in  the  rise.  There- 
fore a  sudden  and  radical  change  in  the  currency  has 
a  significant  effect  on  the  rate  of  wages. 

Improvement  of  Wages  by  Legislation. 
It  used  to  be  customary  in  England  for  the  justice  of 
the  peace  to  regulate  wages  for  a  given  period.  Indeed, 
it  was  a  strong  theory  in  the  early  modern  period  that 
fair  wages  should  be  established  by  law  rather  than  to 
be  trusted  to  competition  and  demand.  But  this  custom, 
which  was  arbitrary  and  useless,  finally  gave  way  to  free 
competition,  until  in  modern  times  no  attempt  has  been 
made  to  regulate  wages  in  industry  by  legislation.     Yet 


174  ECONOMICS. 

the  protective  power  of  legislation  in  creating  better  san- 
itary condition,  in  insisting  that  the  laborer  has  a  right 
in  the  product,  and  in  guaranteeing  his  wages,  has  had 
much  to  do  with  promoting  the  rights  of  the  laborer,  and 
this  has  an  indirect  influence  on  wages.  This  is  the  only 
real  benefit  that  legislation  can  have  to  advance  the  rate 

of  wages. 

Economic  Signification  of  Wages. 

The  discussion  of  wages  belongs  to  economic  distribu- 
tion. It  is  very  important  in  the  general  economic  effect 
of  society.  Well-paid  laborers  are  great  consiimers,  and 
consumption  creates  a  demand  for  goods.  A  body  of  well- 
fed,  well-paid  laborers  is  in  a  measure  a  test  of  the  pros- 
perity of  a  country,  and  to  a  certain  extent  the  index  of 
its  civilization.  This  latter  is  especially  true  if  the  labor- 
ers are  honest,  reliable,  and  of  good  physical  and  moral 
health. 

References:  Clark,  J.  B.,  Possibility  of  a  Scientific  Law  of 
Wages;  Wood,  Stuart,  Theory  of  Wages;  Thompson,  H.  M., 
Theory  of  Wages ;  Mill,  John  Stuart,  Principles  of  Political  Econ- 
omy;  Walker,  F.  A.,  Principles  of  Political  Economy;  Taussig, 
F.  W.,  Wages  and  Capital ;  Ashley,  W.  J.,  The  Adjustment  of  Wages. 


ECONOMICS. 


176 


CHAPTEK  IV. 

INTEREST  AS  A  FACTOR  IN  DISTRIBUTION. 

Nature  of  Interest. 
Income  that  comes  to  capital  is  called  interest.  It  is 
sometimes  used  to  designate  the  entire  yield  of  capital 
before  current  expenses,  risks  and  repairs  are  taken  out, 
when  it  is  then  called  gross  interest.  Net  interest  is 
the  result  after  these  contingent  expenses  have  been  de- 
ducted, and  is  the  true  income  on  capital  itself. 

Economic  Interest  and  Loan  Interest. 
We  should  also  distinguish  between  economic  or  natural 
interest  and  contract  interest.  Economic  interest  is  actual 
return  to  capital  on  account  of  its  value-creating  power 
in  the  process  of  production.  Loan  interest  represents 
simply  contract  interest,  and  is  the  amount  paid  to  the 
lender  by  the  borrower  for  the  use  of  capital.  In  the 
ordinary  treatment  of  interest,  loan  interest  is  considered 
rather  than  economic  interest.  The  loan  interest  may  be 
greater  than  economic  interest,  but  in  the  long  run  it  tends 
to  approximate  it  when  the  two  elements  of  risk  and  com- 
mission are  left  out.  The  chief  diiference  between  eco- 
nomic interest  and  loan  interest  lies  in  the  variation  in 
loan  interest  caused  by  the  favorable  or  unfavorable  con- 
dition of  the  loan.  Thus,  current  rates  for  short  loans  gen- 
erally vary  greatly  from  current  rates  for  long  loans.  But 
there  is  a  normal  rate  to  which  the  variations  of  current 
rates  usually  tend  in  a  community,  which  comes  very  nearly 


176 


ECONOMICS. 


the  economic  interest, — just  as  contract  wages  or  contract 
rent  tends  to  conform  to  economic  wages  and  economic 
rent,  respectively.  The  essential  fact  in  interest  does  not 
necessitate  a  loan,  for  interest  arises  from  the  use  of 
capital  even  when  it  is  used  by  its  owner.  The  man  who 
engages  in  business  for  himself  and  allows  in  his  accounts 
a  record  of  the  interest  on  his  own  capital,  not  only  ob- 
serves a  good  business  principle,  but  also  approximates 
an  economic  truth.  He  usually  records  the  current  rate, 
but    recognizes    the    income    that   naturally    arises    from 

capital. 

Development  of  Theories  of  Interest. 

There  have  been  very  many  theories  respecting  interest 
advanced  by  the  people  of  ancient  time,  as  well  as  by  dif- 
ferent economists.  This  fact,  however,  does  not  interfere 
with  a  true  theory  of  interest.  All  interest  was  called 
usury  by  the  people  of  the  middle  ages.  And  indeed  the 
Bible  calls  interest  usury,  and  speaks  decidedly  against 
the  man  who  takes  usury.  When  the  Hebrew  writers 
urged  against  the  charge  of  interest,  the  economic  life 
was  entirely  different  from  what  it  is  at  the  present  day. 
Capital  was  then  loaned  for  the  purpose  of  relieving 
distress,  without  thought  of  putting  it  in  business  for  the 
purpose  of  earning  a  large  return  to  the  borrower.  Aris- 
totle held  that  money  was  a  barren  thing;  that  it  could 
not  beget  money,  and  therefore  that  it  was  wrong  to 
charge  interest.  In  the  first  place,  his  mistake  was  in 
supposing  interest  was  charged  on  money  instead  of  on 
capital,  of  which  money  was  only  a  single  form.  In  the 
second  place,  the  modern  processes  of  economic  produc- 
tion had  not  yet  appeared. 

Aristotle   says  that  the  most  hateful   of  all  ways   of 


ECONOMICS. 


177 


earning  money  is  usury,  wliicli  makes  a  gain  out  of  the 
money  itself  without  the  natural  use  of  it.  "  For  money," 
he  says,  ^Svas  intended  to  be  used  in  exchange,  but  not 
to  increase  interest.  And  this  term  usury,  which  means 
the  birth  of  money  from  money,  is  applied  to  the  breeding 
of  money  because  the  offspring  resembles  the  parent. 
Wherefore,  of  all  modes  of  making  money  this  is  the  most 
unnatural."  But  Aristotle  with  all  of  his  wisdom  and 
learning  could  have  known  nothing  of  the  industrial 
revolution,  of  division  of  labor  in  its  extended  form,  of 
power  manufacture  and  the  consequent  modern  uses  of 
capital,  and  therefore  could  have  well  assumed  that  a 
thing  might  be  quite  unnatural  in  his  day  which  is  quite 
natural  in  our  day.  Although  he  was  the  most  learned 
of  the  ancients,  he  could  not  be  expected  to  have  antici- 
pated a  science  which  had  not  yet  been  created;  nor  could 
other  pagan  writers,  who  held  that  money  is  by  nature  in- 
capable of  bearing  fruits,  that  the  lender's  gain  therefore 
cannot  come  from  the  peculiar  power  of  money,  and  that 
it  can  only  come  from  a  defrauding  of  the  borrower,  know 
of  future  development  of  industry  through  capital.  But 
Athens,  and  Rome  herself,  as  civilization  grew  more  com- 
plex, found  the  charging  of  interest  to  be  an  inevitable 
result  of  complexity  of  business  relations,  notwithstand- 
ing the  learning  of  Aristotle. 

In  the  middle  ages  the  writers  and  ecclesiastics  treated 
the  subject  more  thoroughly;  and  at  the  close  of  this 
period,  when  political  economy  was  gradually  developing, 
many  of  them  finally  acknowledged  the  right  of  interest 
to  exist, — a  conclusion  reached  through  their  philosophy^ 
—12 


178 


ECONOMICS. 


for  they  counted  the  practices  of  the  world  all  wrong  and 
could  not  learn  of  them.  The  old  canonists  of  the  twelfth 
and  subsequent  centuries  tried  to  argue  against  the  pay- 
ment of  interest  as  an  abhorrent  thing.  Thus  Gonzalez 
Tellez  wrote :  "  So  then  as  money  breeds  no  money,  it  is 
contrary  to  nature  to  take  anything  beyond  the  sum  lent, 
and  it  may  with  propriety  be  said  that  it  is  taken  from 
industry  than  from  money,  for  money  does  not  breed,  as 
Aristotle  has  related." 

Covarruvias,  another  of  the  canonists,  wrote :  "  The 
fourth  ground  is  that  money  brings  forth  no  fruit  itself^ 
nor  gives  birth  to  anything.  On  this  account  it  is  inad- 
missible and  unfair  to  take  anything  over  and  above  the 
lent  sum  for  the  use  of  the  same,  since  this  is  not  so 
much  taken  from  money,  which  brings  forth  no  fruit, 
as  from  the  industry  of  another." 

And  again  Yaconius  Vacuna :  "  Therefore  he  who  gets 
fruit  from  that  money,  whether  it  be  pieces  of  money 
or  anything  else,  gets  it  from  a  thing  which  does  not 
belong  to  him,  and  it  is  accordingly  all  the  same  as  if 
he  were  to  steal  it." 

Thomas  Aquinas  considered  the  element  of  time  in 
interest,  and  held  that  he  who  charged  interest  charged 
for  time,  which  belonged  alike  to  all,  and  a  thing  of 
which  no  one  could  make  a  monopoly  without  robbery. 

There  were  four  points  in  the  doctrine  of  the  canonistSj 
viz. : 

1.  Loan  interest  is  simply  an  income  which  the  lender 
draws  by  fraud  or  force  from  the  borrower.  2.  The  lender 
is  paid  in  interest  for  fruit  which  barren  money  cannot 
bear.     3.  The  lender  sells  a  use  which  does  not  exist,  or 


ECONOMICS. 


179 


which  in  reality  belongs  to  the  borrower.  4.  The  lender 
sells  time,  which  belongs  to  the  borrower  just  as  much 
as  it  does  to  the  lender  and  to  all  men.  In  every  sense 
interest  appears  as  a  "  parasitic  profit  extorted  or  filched 
from  the  defrauded  borrower."  These  illogical  and  unjust 
arguments  appear  very  crude  to  us  to-day,  who  have  so 
long  been  accustomed  to  the  payment  of  interest.  Yet  they 
serve  to  illustrate  the  truth  that  former  ages  had  their 
vagaries  and  visionary  theories  as  well  as  this,  considered 
in  the  light  of  dogmatic  teaching.  During  the  sixteenth 
and  down  through  the  eighteenth  centuries  the  arguments 
against  interest  gradually  subsided.  The  world  went  on 
practicing  the  use  of  interest  without  taking  heed  to  the 
sayings  of  the  philosophers.  Sometimes  in  recent  years 
people  revive  the  old  controversy  in  a  new  way,  apparently 
not  conscious  of  the  exploded  theories  of  former  days. 

Among  modern  economists  there  have  been  a  variety  of 
views  set  forth,  some  of  them  of  entirely  opposite  char- 
acter. Thus,  James  Mill  and  McCulloch  held  that  in- 
terest was  nothing  but  the  wages  of  labor  stored  up  in 
capital,  and  as  all  capital  was  originally  formed  of 
labor,  that  the  interest  on  the  capital  corresponded  to  the 
wages  of  labor.  The  explanation  of  the  origin  of  capital 
and  its  service  in  production  would  indicate  that  this 
is  not  only  a  confusion  of  terms,  but  also  hints  at  that 
which  is  not  true.  It  was  held  by  Turgot  and  supported 
by  Henry  George,  that  interest  derived  its  reason  to  be 
on  acount  of  live  capital  which  brought  forth  a  return 
without  accompanying  labor.  Thus,  land,  animals,  bees 
and  wine  would  yield  a  return  without  labor.  From  this 
as  a  starting-point,  they  held  that  other  capital  should  have 


180  ECONOMICS. 

the  same  return.  This  traces  interest  to  a  natural  source. 
More  recently  Menger,  J.  B.  Say  and  Hermann  held 
that  capital  brought  forth  interest  because  of  its  especially 
favorable  investment,  which  yielded  a  return  over  and 
above  its  normal  productivity.  Other  writers  have  tried 
to  show  that  capital  has  some  peculiar  power  of  increasing 
so  that  interest  will  grow  out  of  it  under  all  circumstances ; 
but  these  people  overlook  the  idea  of  time,  of  risk,  and  of 
abstinence  or  the  special  diversion  of  capital  into  certain 
channels.  While  abstinence  is  not  the  cause  of  interest, 
it  is  indispensable  to  the  formation  of  interest,  becauses 
through  it  capital  is  placed  in  a  condition  of  service. 

Another  very  erroneous  idea  is  that  interest  is  robbery* 
that  the  product  ought  all  to  go  to  labor,  but  a  robber  seizes 
that  which  belongs  rightly  to  others  and  calls  it  interest. 
These  writers,  among  whom  are  Marx  and  Rodbertus, 
hold  that  there  is  no  rational  cause  for  interest.  If  told 
that  because  a  man  owns  property  he  has  a  right  to 
pay  for  the  same,  the  followers  of  these  writers  have 
asserted  that  man  has  no  right  to  private  property,  and 
they  cry  out  with  Proudhon,  that  "property  is  robbery." 
But  they  claim  if  labor  had  received  its  share  of  the 
net  earnings  there  would  be  no  capital  accumulated  in 
the  hands  of  those  who  do  not  labor.  But  this  does  not 
say  that  the  capital  would  not  have  its  existence,  and  that 
the  laborers  who  would  own  it  could  not  charge  interest 
or  at  least  have  a  right  to  it.  In  fact,  this  is  the  real 
case,  for  the  laborers  of  this  life  are  the  capitalists ;  they 
are  the  ones  who  save  and  who  obtain  a  return  from  their 
savings.  In  reality,  granting  two  points, — that  a  man  has 
the  right  of  property  and  that  tlie  laborer  has  the  right  of 
wages, — I  have  no  more  right  to  ask  a  man  to  allow  me 


ECONOMICS.  181 

to  use  his  capital  without  a  return  than  I  have  to  ask 
him  to  work  for  me  without  a  return  in  wages.  How 
absurd  for  me  to  say  to  a  man^  "You  are  stronger  than 
I,  and  as  I  have  work  to  be  done  which  will  greatly 
benefit  me,  if  you  will  come  to  w^ork  for  me  I  shall  have 
a  better  living,  a  finer  house  and  more  leisure;  and  for 
this  service  I  propose  to  pay  you  nothing,  because  you 
have  no  right  to  charge  me  for  such  services."  Would 
it  not  be  equally  absurd  for  me  to  say,  "You  have  a  thou- 
sand dollars  and  I  have  none;  let  me  take  your  money_, 
as  I  know  a  profitable  investment  where  I  can  make  a 
large  return  in  a  short  time ''  ?  And  you  say,  "  What 
will  you  give  me  for  the  use  of  this  money  ?  "  I  say^ 
"  E'othing ;  you  do  not  need  it  and  I  do."  How  absurd 
such  a  proposition  would  be! 

Interest  a  Premium  on  Exchange. 
In  his  admirable  work  on  Capital  and  Interest,  Boehm- 
Bawcrk  gives  a  careful  review  of  all  theories,  and  finally 
advances  his  own,  which  seems  to  throw  much  light  upon 
the  subject.  He  holds  that  a  loan  is  an  exchange  of 
present  goods  against  future  goods.  On  account  of  the 
ordinary  desires  of  man  to  value  present  things  more  than 
future  ones,  a  lump  of  capital  is  worth  more  to-day  than 
its  future  valuation  for  a  year  from  to-day.  Hence  if 
present  commodities  command  a  premium  over  future 
ones,  it  is  to  be  observed  that  a  sum  of  present  wealth 
is  to  be  had  only  at  the  price  of  a  greater  one  in  future. 
This  premium  is  the  net  interest.  This  places  all  loans 
on  a  purely  exchange  basis,  and  makes  interest  the  differ- 
ence in  the  price  of  a  commodity  of  to-day  from  the  same 
commodity  a  year  from  to-day.  It  is  a  simple  business 
way  of  estimating  interest,   and   disposes   effectually   of 


182 


ECONOMICS. 


the  theories  which  have  heen  advanced  to  show  that  money 
is  barren,  or  that  money  is  fruitful  in  itself,  or  that  in- 
terest is  robbery.  That  is,  you  have  a  horse  which  I  ask 
you  to  loan  me  for  a  year.  To-day  the  horse  is  worth  $100. 
But  I  will  not  agree  to  give  you  a  hundred  dollars  for 
the  horse  a  year  from  to-day,  because,  supposing  that 
he  will  be  in  good  condition  then  as  now,  a  year's  service 
has  gone.  Hence  if  I  borrow  the  horse  for  a  year  I  must 
return  something  besides  the  horse  to  make  an  even  trade. 
It  is  the  same  with  the  hundred  dollars  being  worth  more 
money  to-day  than  it  will  be  a  year  from  to-day, — I  agree 
to  pay  that  difference,  which  is  $8  or  $6,  as  the  case  may 
be.  This  is  called  interest,  and  may  be  paid  now  or  a 
year  from  now.  This  interest  is  usually  calculated  in  a 
given  rate  on  the  principal,  which  is  sometimes  mislead- 
ing. 

Kate  on  Loans. 

The  rate  on  loans  varies  slightly  during  a  long  period 
of  time.  There  is  a  steady  decline  in  interest  as  society 
becomes  more  stable  and  business  investments  more  per- 
manent. But  the  rates  vary  in  different  countries  as  well. 
In  England  interest  is  lower  than  in  Boston,  and  it  is 
lower  in  Boston  than  in  Kansas  City.  The  chief  causes 
of  this  are,  first,  the  amount  of  available  capital  seeking 
employment  in  older  countries;  and,  second,  the  element 
of  risk.  People  do  not  like  to  take  the  risk  of  loaning 
money  in  new  and  unsettled  countries,  or  in  lands  far 
away  from  home.  In  the  former  case  they  will  do  so  if 
the  interest  is  large  enough  to  tempt  them  to  take  the 
risk;  in  the  latter  case,  if  interest  is  sufficient  to  cover 
risks  and  agents'  commissions,  they  may  make  loans.  I 
said  that  the  rate  of  interest  continually  decreases,  although 


ECONOMICS. 


183 


the  process  is  a  slow  one  if  we  exclude  the  element  of 
risk,  which  may  cause  a  sudden  change  in  the  interest  at 
any  time.  Thus,  in  early  times  in  Kansas,  money  was 
loaned  at  the  rate  of  eighteen  per  cent.,  and  it  was  not  long 
ago  that  current  rates  were  twelve  and  thirteen  per  cent. 
N^ow,  the  usual  rate  is  eight  per  cent,  at  banks,  while  first- 
mortgage  loans  are  six  and  seven  per  cent,  in  eastern 
Kansas,  and  four-per-cent.  school  bonds  sell  readily  at 
a  premium ;  while  banks  charge  ten  per  cent,  on  short-time 
loans.  In  1876  in  California  one  and  one-half  and  two 
per  cent,  per  month  were  common  charges  in  many  parts 
of  the  State,  while  one  per  cent,  per  month  was  a  fair 
average  in  San  Francisco.  The  great  cause  of  this  decline 
is  in  the  fact  that  large  amounts  of  capital  have  accumu- 
lated in  London  and  in  the  large  cities  of  the  eastern 
part  of  our  nation,  which  are  seeking  investment.  And 
on  the  other  hand,  the  West,  having  become  more 
stable  than  formerly  there  is  less  risk  engendered.  The 
yearly  average  of  interest  in  London  for  the  last  twenty 
years  has  been  less  than  four  per  cent. ;  it  exceeded  that 
amount  but  one  year.  In  1888  the  British  debt  was 
funded  at  two  and  three-fourths  and  two  and  one-half 
per  cent.,  and  it  is  not  uncommon  to  charge  only  two  and 
two  and  one-half  per  cent,  for  money  in  London.  People 
are  glad  to  get  four  to  five  per  cent,  in  New  England 
on  gilt-edged  security.  It  is  difficult  to  loan  money  at 
five  and  one-half  per  cent,  in  Kansas  City  on  first-class 
security.  Other  things  being  equal,  the  rate  of  interest 
will  depend  on  the  amount  of  available  capital  seeking 
employment;  or  in  other  words,  upon  the  demand  and 
supply.  But  other  things  are  not  always  equal.  For 
example,  in  times  of  panic  and  unsettled  business  there 


184 


ECONOMICS. 


may  be  plenty  of  money  with  interest  low,  or  at  certain 
stages  there  may  be  plenty  of  money  and  interest  high] 
but  where  a  large  amount  of  money  seeks  honest  and 
legitimate  investment  it  must  have  an  effect  in  lowering 
interest.  The  rate  of  interest  will  vary,  secondarily,  ac- 
cording to  the  desire  of  people  to  enter  new  business,  and 
it  is  also  somewhat  dependent  upon  the  character  of  the 
borrowing  community.  If  the  latter  has  a  record  of  pay- 
ing debts  promptly  and  without  failure,  more  favorable 
terms  of  interest  may  be  had;  while  if  there  are  doubts 
as  to  its  solvency,  the  rates  of  interest  are  higher. 

Effect  of  Cheap  Money  on  Interest. 

Some  people,  and  even  some  economic  writers,  have 
been  mistaken  as  to  the  effect  of  a  cheaper  money  on  in- 
terest. If  the  purchasing  power  of  money  could  be  reduced 
one-half  it  would  not  cheapen  interest,  as  an  inflated  cur- 
rency has  no  perceptible  influence  on  interest.  For  if  the 
interest  is  paid  by  a  given  per  cent.,  the  same  proportion  of 
the  cheap  money  will  go  to  pay  the  debt.  In  another  way, 
however,  inflation  frequently  leads  to  speculation,  and 
this  brings  on  a  higher  rate  of  interest.  If,  however,  a 
debt  is  contracted  in  one  form  of  money  and  the  interest 
made  payable  in  another,  dearer  form  of  money,  then 
interest  will  be  increased  directly  by  inflation. 

Leg^islation  and  Interest. 

One  of  the  most  difficult  points  to  consider  in  relation 
to  interest  is  the  result  of  legislation  on  interest.  Can 
a  single  State  reduce  the  rate  of  interest  by  passing  a 
law  to  reduce  it  below  the  current  commercial  rate  ?  The 
general  tendency  of  all  legislation  to  reduce  interest  is 
to  make  it  more  difficult  for  the  borrower.    However,  there 


ECONOMICS. 


185 


are  some  things  to  be  observed  in  connection  with  this 
general  assertion.  So  long  as  a  State  can  bj  the  power 
of  legislation  change  the  custom  or  habits  of  the  people, 
there  is  some  governmental  power  in  the  reduction  of  in- 
terest. Suppose  the  current  rate  based  upon  the  supply 
and  demand  in  a  given  State  should  be  eight  per  cent., 
and  suppose  the  legislature  should  suddenly  pass  a  law 
that  no  more  than  ^ve  per  cent,  should  be  charged,  and 
fix  a  heavy  penalty  for  disobeying  the  law.  Two  things 
will  occur:  first,  money  will  seek  other  countries  for  an 
investment  and  the  current  rate  will  rise;  second,  the 
law  will  be  evaded,  if  not  violated,  and  those  persons  who 
borrow  money  will  suffer.  However,  if  in  this  given 
State  people  have  been  charging  a  large  interest  through 
long  custom  and  lenders  have  a  sort  of  monopoly  on  loan 
funds,  laws  may  be  passed  asserting,  for  example,  that  six 
per  cent,  is  the  proper  rate  of  interest;  this  measure  will 
have  a  large  influence  in  the  reduction  of  interest,  if  there 
be  a  considerable  amount  of  home  capital.  For  the  bor- 
rower will  borrow  less  money,  rather  than  to  take  it  at 
a  price  which  is  declared  exorbitant.  And  lenders,  rather 
than  have  their  money  idle  and  rather  than  have  it  leave 
the  State  for  a  higher  rate,  will  loan  at  a  lower  rate.  Like- 
wise, lenders  will  slowly  adjust  themselves  to  the  new 
rate,  simply  because  their  attention  has  been  called  to 
the  fact.  In  some  Eastern  States  the  rate  has  been  fixed 
for  years  at  six  per  cent.  In  these  States,  in  country  towns 
and  country  places  at  least,  no  one  thinks  of  charging 
more.  It  is  not  the  law  so  much  as  custom,  education,  and 
I  may  say  religion,  that  keeps  the  rate  below  this  maxi- 
mum. On  the  other  hand,  without  any  collusion  the  banks 
of  a  small  town  may  demand  a  certain  rate  because  they 


186 


ECONOMICS. 


have  always  charged  a  certain  rate,  and  thus  refuse  to  take 
less.  People  who  must  have  money  will  pay  the  charges 
rather  than  go  without;  but  the  same  custom  is  observed 
to  a  large  extent  in  merchandise  in  a  small  town,  because 
it  is  slow  to  feel  the  rise  and  fall  in  the  general  market. 
Custom  rules  to  a  considerable  extent,  although  these  are 
really  exceptions  to  the  general  law.  Legislation  for  the 
reduction  of  the  rate  of  interest  has  generally  proved  to 
be  a  dangerous  thing  for  the  borrower.  A  law  fixing 
a  maximum  rate  is  very  valuable  in  cases  where  no  rate 
is  mentioned  in  contracts,  or  where  a  judgment  for  interest 
is  rendered.  It  also  to  a  certain  extent  prevents  extor- 
tion in  certain  cases.  This  is  absolutely  essential  in  all 
well-regulated  countries. 

Interest  as  an  Economic  Factor  in  Distribution. 
While  it  has  been  stated  that  land  and  labor  are  the 
two  essential  factors  in  production,  and  precede  capital 
in  logical  order,  it  is  also  known  that  when  capital  is 
once  created  it  enters  into  production  and  claims  its  own 
reward  in  interest.  Interest  must  always  be  satisfied 
wherever  capital  is  used  in  production.  The  wages  of 
labor  and  the  rent  on  land  are  not  more  certain  than  the 
interest  on  capital.  In  the  process  of  production  many 
people  go  into  business  who  are  not  capable  of  manage- 
ment, and  interest  finally  absorbs  their  earnings  and  the 
result  is  they  must  quit  business.  But  this  does  not  mili- 
tate against  interest  as  a  natural  factor  in  distribution. 
Capital  is  a  necessity  in  modern  production,  and  its  just 
reward  is  interest,  which  must  be  paid. 

References:  Clark,  J.  B.,  Capital  and  Its  Earnings;  Boehm- 
Bawerk,  Eugene  von,  Capital  and  Interest;  Ely,  R.  T.,  Outlines 
of  Economics;  Cassell,  G.,  Nature  aj)d  Necessity  of  Interest. 


ECONOMICS. 


187 


CHAPTEE  Y. 


PEOFITS. 


Gross  Profits. 
Some  classify  all  the  returns  of  industry  as  profits,  in- 
cluding rent  for  the  use  of  land,  interest  on  capital,  and 
profits  of  management;  but  it  is  profits  of  management 
that  concern  us  in  the  present  analysis.  Gross  profits 
must  be  distinguished  from  the  profits  of  the  entrepreneur 
or  manager,  which  are  called  pure  profits.  If  we  would 
consider  any  given  business  we  should  find  that  there  must 
be  a  replacement  of  the  amount  of  capital  used  out  of 
the  entire  receipts  of  the  year ;  that  the  interest  on  capital 
must  be  paid,  and  also  a  certain  sum  in  the  forili  of  a  pay- 
ment for  risk  must  be  set  aside  to  tide  over  bad  years ;  and 
that  the  wages  of  superintendence  must  also  be  paid.  If 
there  is  anything  left  out  of  the  returns  for  a  single  year 
we  call  it  pure  profits,  which  goes  to  the  manager  of  the 

business. 

Pure  Profits. 

If  we  consider  normal  industry  we  shall  see  the  division 
of  the  net  product  into  the  different  shares  accruing  to 
landlord,  capitalist,  and  laborer;  we  shall  observe  that 
industrial  enterprises  go  on  from  year  to  year  working  on 
this  basis.  The  managers  of  business  may  receive  nothing 
more  than  the  wages  of  superintendence.  So  long  as  they 
receive  this,  business  will  continue.  If  they  fall  short  of 
this,  business  will  cease.  But  there  are  certain  concerns 
more  favorably  situated  or  better  managed  than  others, 


183 


ECONOMICS. 


which  yield  a  surplus  of  profits  over  and  above  the  pay- 
ment of  the  ordinary  expenses  of  business.  This  surplus 
of  pure  profits  accrues  on  account  of  excessive  skill  of 
management.  It  has  sometimes  been  called  the  rent  of 
superior  characteristics.  It  more  naturally  falls  into  this 
category  than  any  other.  Yet  according  to  most  writers 
it  is  called  profits,  and  we  follow  the  rule  to  avoid  con- 
fusion. Business  ability  or  the  quality  of  management 
makes  the  return  of  profits  uncertain  and  indefinite. 
^Nevertheless  it  is  true  that  all  businesses  can  be  arranged 
in  a  group,  passing  all  the  way  from  no-profit»  industry 
to  that  of  a  large  return. 

Competition  and  Profits. 

Competition  also  destroys  pure  profits,  or  tends  to  re- 
duce them.  The  person  who  obtains  some  means  of  pro- 
ducing cheaply,  or  has  obtained  a  desirable  location,  or  by 
skill  in  advertising  has  succeeded  in  making  a  large  profit, 
cannot  continue  long  before  others  discover  his  secret  and 
enter  the  same  field.  Hence  in  any  given  industry  profits 
continue  to  decrease  gradually ;  and  the  older  the  country 
the  more  rapidly  they  decrease.  Hence  there  is  a  tendency 
to  level  down  profits. 

The  Managing  Class. 

The  power  of  the  managing  class  in  business  is  very 
great.  An  observation  of  the  number  of  failures  in  busi- 
ness of  any  sort  or  description  is  evidence  of  the  need  of 
skill  to  conduct  business  properly  and  with  profit.  Thou- 
sands, presuming  upon  a  skill  they  did  not  possess,  have 
wrecked  their  business  and  dragged  others  down  with  them. 
In  discussing  the  labor  problem,  or  the  problem  of  capital, 
not  sufficient  importance  has  been  given  to  the  managers 


ECONOMICS.  189 

of  business,  who   are  the  true  employers  of  labor;  nor 

sufficient  credit  for  their  part  in  productive  enterprises. 

Without  them  the  wheels  of  industry  would  stop;    the 

modern  process  of  production  includes  them  as  essential 

factors. 

Profits  and  Rent. 

As  was  stated  above,  the  law  of  profits  is  to  a  certain 
extent  governed  by  the  same  law  as  that  of  rent.  The 
power  to  command  profits  must  rest  upon  exceptional  op- 
portunities and  exceptional  abilities  which  combined 
make  profits  possible.  There  are  a  large  number  of  people 
who  are  doing  business  for  the  sake  of  profits  who  obtain 
no  return.  All  that  their  business  pays  is  the  wages  of 
labor,  interest  on  capital,  and  wages  of  superintendence, 
together  with  other  expenses  such  as  rent,  taxes,  insurance, 
etc.  Pure  profits  do  not  emerge  in  the  transaction.  The 
result  is  that  these  businesses  will  continue  to  run  until 
a  fall  in  price  or  depression  in  trade  causes  them  to  close. 
Other  businesses  in  the  same  line,  on  account  of  favorable 
location,  the  prestige  of  business  through  trade-marks^ 
advertising,  and  other  means,  or  through  superior  skill  of 
management,  yield  a  return  in  pure  profits.  It  is  easy  to 
observe  that  the  principle  here  is  the  same  as  that  of  rent. 
The  chief  difference  is  that  profits  arise  from  very  uncer- 
tain conditions.  There  is  less  regularity  in  the  appearance 
of  profits  than  in  the  appearance  of  rent,  nevertheless 
the  principle  involved  is  the  same.  While  strictly  speak- 
ing there  might  be  no  condition  of  business  in  which  gross 
profits  might  not  rise,  there  might  be  conditions  of  business 
in  .which  pure  profits  might  not  be  seen.  But  even  this 
condition  cannot  long  continue,  for  the  entrepreneur  who 
makes  no  return  in  a  given  year  hopes  to  make  the  year 


190  ECONOMICS. 

following.     When  he  realizes   that  he   does   not  receive 

profits,  unless  he  be  manager  of  his  own  business  and 

receives  wages  of  superintendence,  he  will  cease  to  carry 

on  business. 

Pure  Profits  and  Market  Prices. 

It  is  evident  that  pure  profits  do  not  enter  into  the 
price  of  commodities  in  a  market,  nor  do  they  interfere 
with  wages  in  any  form.  Profits  themselves  are  obtained 
from  wealth,  which  is  created  by  extraordinary  abilities 
or  opportunities.  The  price  of  manufactured  goods  in  a 
market  is  determined  by  the  supply  and  demand,  and 
the  price  has  a  tendency  to  ^x  profits  rather  than  profits 
the  price.  The  market  price  of  goods  is  always  indicated 
by  the  cost  of  production  of  that  proportion  of  the  supply 
which  is  produced  under  the  most  disadvantageous  cir- 
cumstances, just  as  the  corn  raised  upon  the  poorest  soil 
cultivated  is  an  indication  of  the  market  price  because 
the  soil  will  be  cultivated  when  it  will  barely  pay  the 
cost  of  production.  Therefore  the  cost  of  production  on 
poor  land  is  evidence  of  the  market  price  of  the  product. 
The  same  is  true  in  regard  to  profits.  The  no-profits  enter- 
prise shows  the  cost  of  production,  and  as  long  as  it  pays 
the  work  will  be  carried  on ;  that  is,  as  long  as  the  market 
price  covers  the  cost  the  business  will  continue.  Thus 
the  no-profits  business  is  an  indicator  of  the  market  price, 
rather  than  a  cause.  Hence  it  will  be  seen  that  profits 
have  nothing  to  do  with  the  establishment  of  the  market 
price. 

As  the  payment  of  wages  is  a  part  of  the  cost  of  produc- 
tion, it  is  easy  to  see  that  pure  profits  are  not  increased 
by  the  reduction  of  wages.  Considering  the  gross  product, 
it  is  seen  that  wages  are  a  variable  proportion  of  it.     It  is 


ECONOMICS.  191 

also  seen  that  profits  are  a  variable  proportion  of  a  varia- 
ble product,  and  if  in  all  the  factors  of  distribution  any  one 
can  be  considered  a  residual  claimant,  it  is  profi.ts.  There- 
fore pure  profits  do  not  lower  wages. 

Monopoly  Profits  and  Monopoly  Prices. 

Elsewhere  we  have  referred  to  monopoly  prices  and 
monopoly  profits.  All  profits  are  necessary,  tempo- 
rary, or  monopoly  profits.  The  necessary  profits  are  that 
portion  of  the  gross  profits  which  keeps  business  running 
and  without  which  business  would  cease.  Temporary 
profits  are  those  that  are  obtained  from  advantageous  sit- 
uation, opportunity,  and  skill  of  management,  and  are  con- 
sidered as  pure  profits.  Monopoly  profits  arise  when 
exclusive  control  of  a  given  business  is  obtained,  and  are 
essentially  more  permanent  than  others.  They  arise  from 
the  universal  control  of  a  given  business  in  which  compe- 
tition is  shut  out.  The  monopoly  price  is  established 
on  the  basis  of  the  largest  possible  return  for  a  given  busi- 
ness. It  is  only  necessary  to  determine  at  what  net  price 
the  business  will  yield  the  largest  return  of  net  income. 
For  example,  if  we  consider  the  possible  prices  of  a  given 
commodity  to  be  six,  eight  and  ten  cents  per  pound  or 
article,  it  is  observed  that  if  nine  cents  per  pound  there 
will  be  a  given  amount  sold.  If  the  price  is  raised  to 
ten,  the  sales  will  be  less  and  consequently  expenses 
somewhat  lessened  in  proportion  to  the  sale.  If  the  price 
is  reduced  to  eight,  the  sales  will  be  increased  until  the 
demand  is  satisfied.  But  with  the  increase  of  sales  will  be 
the  increase  of  expenses.  If  the  price  is  reduced  to  seven^ 
the  sales  will  be  enlarged  and  the  expenses  increased.  ^NTow 
at  what  point  will  be  the  largest  net  return  ?     This  point 


192  ECONOMICS. 

will  be  when  the  sales  are  relatively  large  and  the  ex- 
penses relatively  small.  Every  monopoly  working  on  a 
business  basis  will  seek  to  find  this  monopoly  price; 
though  it  has  the  power  to  charge  a  high  price,  it  will  not 
do  so  unless  it  can  increase  its  income  thereby.  As  a  rule, 
permanent  monopoly  prices  are  steadier  and  lower  than 
competition  prices ;  and  in  most  businesses  it  is  true  that 
the  actual  price  is  lower  than  the  permanent  monopoly 
price,  for  fear  of  competition  which  might  set  in  where 
there  are  evidences  of  enormous  profits.  For  nearly  all 
monopolies  are  subject  to  changes,  and  may  not  be  con- 
sidered absolutely  necessary,  permanent  affairs. 

References  :  Walker,  F.  A.,  Political  Economy  ;  Hadley,  A.  T., 
Economics;  Ely,  R.  T.,  Outlines  of  Economics;  Hobson  John  A., 
The  Economics  of  Distribution;  Clark,  J.  B.,  The  Distribution  of 
Wealth. 


ECONOMICS.  193 


CHAPTEE  VI. 

COOPERATION  AND  PROFIT-SHARING  AS  PROCESSES  OF 
DISTRIBUTION. 

Nature  of  Cooperation. 

There  is  unconscious  cooperation  of  all  people  engaged 
in  production.  There  is  also  the  conscious  cooperation 
of  people  in  the  form  of  firms,  trusts,  corporations,  and 
business  houses.  But  cooperation  in  its  purely  economic 
sense  means  a  union  of  laborers  in  a  given  enterprise, 
either  of  production  or  distribution.  Where  laborers  band 
together,  use  their  own  capital,  manage  their  own  business, 
pay  themselves  wages,  and  thus  have  a  right  to  the  entire 
product  of  the  industry,  we  call  it  cooperation.  During 
the  last  half-century  many  attempts  have  been  made  to 
carry  on  this  kind  of  cooperation,  more  or  less  of  which 
have  been  successful.  The  real  object  is  to  get  rid  of 
the  manager  of  business,  who  obtains  the  pure  profits  for 
himself,  and  make  a  division  of  these  profits  among  the 
laborers.  After  wages,  interest  on  capital,  and  the  gen- 
eral expenses  of  management  have  been  paid,  the  surplus 
earnings  are  divided  among  the  members  of  the  coopera- 
tive association. 

Distributive  Cooperation. 

Cooperation  is  generally  considered    of  two  kinds :   dis- 
tributive and  productive.     Distributive  cooperation  is  a 
trade  operation  for  the  distribution  of  goods,  on  a  profit 
which  is  to  accrue  to  all  members  of  a  given  association. 
—13 


194  ECONOMICS. 

If  an  association  is  formed  for  the  purpose  of  conduct- 
ing a  store  with  special  privileges  to  its  members,  an  indi- 
vidual is  employed  to  manage  the  store,  clerks  are  hired, 
and  wages  paid.  Money  is  borrowed,  on  which  interest 
is  paid,  and  all  the  ordinary  expenses  of  the  business  are 
paid  the  same  as  in  any  other  mercantile  enterprise.  Each 
member  of  the  association  puts  in  a  certain  amount  of 
capital,  which  becomes  the  basis  of  the  stock.  Members 
then  have  special  privileges  of  buying.  They  either  buy 
their  goods  at  a  reduced  rate,  or,  what  is  better,  buy  at 
an  ordinary  rate,  receiving  tickets  stating  the  amount 
purchased.  At  the  close  of  the  quarter  of  the  year,  when 
all  expenses  have  been  paid  and  capital  replaced,  a  divi- 
sion of  profits  occurs  on  the  basis  of  amount  of  purchases 
of  each  individual.  The  Grange  stores  and  the  Farmers^ 
Alliance  stores  of  the  United  States  have  been  the  most 
prominent  examples  of  this  kind  of  cooperation  in  Amer- 
ica. In  England  numerous  societies  have  been  formed 
in  the  past  sixty  years,  and  also  in  France  and  other 
countries.  In  England  and  France,  especially  the  former 
country,  distributive  cooperation  has  been  carried  on  with 
great  success,  although  as  a  rule  the  experiment  has  failed 

in  America. 

Productive  Cooperation. 

This  involves  the  creation  of  goods.  For  example,  a 
number  of  laborers  desiring  to  get  rid  of  the  managers, 
or  "bosses"  as  they  are  termed,  band  themselves  together^ 
each  one  putting  in  a  certain  amount  of  capital  to  start 
the  business.  They  either  choose  one  of  their  members  as 
an  overseer,  or  hire  some  one  for  this  purpose.  Virtually 
they  are  laborers  without  masters,  directing  their  own 
business  and  seeking  to  obtain  the  entire  surplus  of  their 


ECONOMICS.  195 

earnings.  If  business  enlarges,  they  may  take  in  more 
members  or  hire  laborers  to  help.  The  goods  manufac- 
tured are  sold  on  the  market  in  competition  with  goods 
of  other  firms.  At  the  close  of  the  business  year,  after 
they  have  allowed  themselves  wages,  paid  the  interest  on 
capital  and  the  wages  of  management  and  all  expenses  of 
the  business,  they  divide  the  profits  or  share  the  losses 
of  the  business.  Wherever  opportunities  have  been  favor- 
able for  the  development  of  cooperative  business  and  from 
the  first  good  management  has  been  secured,  productive 
cooperation  has  succeeded.  But  it  is  much  more  difficult 
than  distributive  cooperation,  and  therefore  has  not  met 
with  the  same  success. 

Distributive  Cooperation  in  England. 

The  most  remarkable  success  of  distributive  cooperation 
has  been  in  England.  Robert  Owens  and  others  agitated 
the  question  of  cooperation  largely  upon  a  communistic 
basis,  and  from  1820  to  1840  numerous  experiments  were 
tried  in  England,  nearly  all  of  which  completely  failed. 
In  1840  a  group  of  weavers  calling  themselves  the  Roch- 
dale Pioneers  formed  a  cooperative  association  and  opened 
a  small  store.  It  appears  that  at  this  time  retail  prices 
were  very  high,  and  that  articles  furnished  laboring-men 
were  of  a  very  poor  grade.  The  aim  of  this  cooperation 
was  to  furnish  good,  substantial,  unadulterated  articles 
at  a  fair  price  to  the  members  of  the  association.  They 
began  with  a  very  small  capital,  each  one  furnishing  a 
pound  sterling,  which  was  to  be  paid  in  installments. 
The  establishment  flourished  and  enlarged,  becoming  a 
successful  business  enterprise.  Other  societies  were  soon 
formed,  until  there  are  a  large  number  in  England  carry- 


196 


ECONOMICS. 


ing  on  a  successful  business.  After  a  large  number  of 
retail  establishments  had  been  formed,  they  began  to  or- 
ganize wholesale  establishments.  So  that  England  to-day 
has  a  system  of  distributive  cooperation  extending  through- 
out the  United  Kingdom. 

The  Rochdale  society  grew  from  a  small  membership 
and  an  insignificant  business  with  a  small  store,  into  three 
large  cooperative  branches,  having  in  1895  19,064  mem- 
bers; a  share  and  loan  capital  of  £476,222;  an  annual 
trade  of  £402,222,  which  yielded  an  annual  profit  of 
£57,776.  More  than  this,  the  movement  that  started  in 
Rochdale  spread  throughout  the  entire  country,  until  in 
1895  there  were  1,486  distributive  societies,  having 
1,314,093  members.  The  share,  loan  and  reserve  capital 
amounted  to  £16,494,630  and  the  annual  trade  to  £34,- 
224,815,  which  yielded  a  net  profit  of  £4,892,712.  The 
principles  controlling  distributive  cooperation  are  so  well 
learned  in  England  that  there  are  few  failures  now,  com- 
pared with  the  number  of  successes. 

In  France  distributive  cooperation  has  not  been  carried 
on  in  such  an  extensive  manner  nor  with  such  marked 
success,  although  the  excellent  work  don©  there  is  re- 
markable. It  is  unfortunate  that  in  the  United  States 
so  many  wrecked  institutions  have  followed  in  the  wake 
of  the  two  great  movements  known  as  the  Grange  and 
Farmers'  Alliance.  The  causes  for  these  failures,  how- 
ever, are  attributable  to  two  distinct  sources:  first,  that 
the  principles  governing  distributive  cooperation  are  not 
so  well  understood  in  America;  and  second,  that  politics 
in  each  case  has  steadily  impaired  the  usefulness   and 


ECONOMICS. 


197 


success  of  these  two  great  institutions,  primarily  organ- 
ized  as   non-partisan  industrial   enterprises. 

Productive  Cooperation  in  England. 
The  success  of  productive  cooperation  has  been  of  more 
recent  date  in  England.  Indeed,  it  is  much  more  diffi- 
cult to  manage  than  distributive  cooperation,  for  it  must 
depend  upon  the  market  of  goods  after  they  have  been 
created.  J^umerous  experiments  have  been  tried  in  differ- 
ent countries  with  varying  success,  but  it  was  not  until 
1870  that  the  movement  received  the  impetus  which 
brought  it  permanent  success.  Several  productive  socie- 
ties were  formed  on  a  cooperative  basis,  in  which  the 
wage-earners  became  their  own  managers  and  secured  to 
themselves  all  of  the  surplus  profits.  These  efforts  were 
greatly  forwarded  in  1884  by  the  establishment  of  "  The 
Labor  Association,"  which  had  for  its  special  work  the 
promotion  of  cooperation  among  the  wage-earners.  The 
importance  of  this  association  is  sufficient  reason  for  set- 
ting forth  in  detail  its  objects  as  given  by  Mr.  E.  V. 
!N'eale,  its  first  president  and  founder: 

"  To  form  public  opinion  on  the  subject  of  associated 
labor  by  the  following  means,  viz. : 

"1.  The  publication  and  supply  of  literature. 

"2.  The  delivery  of  lectures,  addresses,  etc. 

"3.  The  holding  of  conferences  of  all  classes  of  persons 
interested  in  the  elevation  of  the  worker. 

"4.  To  assist  workingmen  to  organize  themselves  for 
mutual  employment. 

"5.  To  enlist  the  active  members  of  the  trade  societies 
in  the  cooperative  movement. 

"6.  To  secure  a  united  action  of  trade-unionists  and 
cooperators  for  mutual  benefit  and  progress. 


198  ECONOMICS. 

"7.  To  give  information  generally  on  the  position  of 
cooperative  workshops  and  condition  of  workers.' ' 

In  order  to  carry  out  these  principles  and  to  obtain 
these  objects,  branches  and  lodges  of  the  Association  were 
formed,  each  governed  by  rules  and  regulations  best  suited 
to  the  ends  sought.  "  It  will  be  seen,"  says  Mr.  Keale, 
"that  the  Labour  Association  is  essentially  a  propagandist 
body^  which  seeks  to  form  opinion,  and  thus  to  stimulate 
action,  and,  if  it  succeeds  in  calling  forth  productive  socie- 
ties, may  serve  as  a  valuable  union  among  them ;  but  does 
not  itself  propose  to  engage  in  any  productive  enterprise, 
and  therefore  will  not  in  any  way  pledge  the  responsibility 
of  any  persons  who  may  want  to  join  it,  by  any  sort 
of  commercial  undertaking."  By  the  means  of  this  strong 
agency  the  cause  of  cooperation  is  kept  before  the  people 
interested,  and  its  gospel  perpetually  preached. 

Among  the  societies  that  had  exhibits  at  the  Crystal 
Palace  in  1896  the  following  industries  were  represented: 
Agricultural  and  Horticultural;  Worsteds;  Manufacture 
of  Needles;  Bookbinding;  Boots  and  Shoes;  Piano- 
fortes; Nails;  Pottery;  Cotton  Goods;  Tannery; 
Watches;  Buckets  and  Fenders;  Quilts;  Engineers' 
Goods;  Household  Goods;  Ironworks;  Clothing;  Hosiery; 
Printing ;  Cocoa ;  Leathergoods ;  Ship-  and  Boat-Building ; 
Padlocks;  Woolen  and  Cotton  Goods;  Sundries;  Silks; 
and  Woolens.  Thus  it  is  seen  that  the  cooperative  socie- 
ties cover  a  wide  range  of  industries  and  are  capable  of 
engaging  in  almost  any  enterprise.  The  progress  of  most 
of  these  associations  is  very  slow,  and  yet  the  permanent 
and  business  characteristics  are  evident.  Take  as  an  ex- 
ample the  Hebden  Bridge  Fustian  Manufacturing  Co- 


ECONOMICS. 


199 


operative  Society,  Limited,  whicli  was  organized  in  1870 
for  the  purpose  of  manufacturing  fustians,  velveteens, 
cords  and  modes  of  all  kinds.  Hebden  Bridge  had  long 
been  the  center  for  the  manufacture  of  fustians.  But  the 
trade  had  for  some  time  been  disturbed  and  the  relations 
between  employers  and  employees  had  been  strained. 
There  was  much  suffering  among  the  work-people.  When 
one  of  their  number,  an  old  man,  died  on  account  of 
carrying  too  heavy  a  burden,  it  was  necessary  to  raise 
funds  by  subscription  to  give  him  a  decent  burial.  This 
was  the  occasion  of  forming  a  friendly  society  to  provide 
for  oases  of  this  kind.  They  fixed  the  assessment  at 
threepence  per  week,  and  agreed  that  the  funds  should 
be  devoted  to  the  establishment  of  a  fustian  cutting  and 
dyeing  establishment.  About  thirty,  all  poor  men,  formed 
the  original  company.  Their  subscriptions  were  at  first 
very  meager,  but  they  continued  to  lay  aside  their  earn- 
ings. When  they  accumulated  £10,  it  was  invested  in  a 
cooperative  store  in  town.  It  was  estimated  that  it  would 
take  £1,000  to  purchase  a  dyeing  establishment  and  rent 
a  place  to  carry  on  the  work.  They  rented  a  small  room, 
and  used  their  spare  time  to  fit  it  up,  and  to  put  in  a  few 
fixtures.  By  vigorous  work  they  found  at  the  end  of  the 
first  quarter  they  had  a  capital  of  £37  7s.  and  lld.j  with 
which  to  begin  work.  The  members  did  the  work  at  the 
usual  rate  of  payment,  and  this  added  to  their  share 
capital.  The  local  stores  became  their  customers  and  their 
market  enlarged  to  adjoining  towms.  The  society  soon 
had  sixty  members,  and  they  began  to  manufacture  ready- 
made  garments  as  well  as  cloth.  In  1874  they  extended 
their  business  and  opened  a  dyeing  shop,  and  in  1886 


200 


ECOW^OMICS. 


they  enlarged  their  plant  and  began  to  weave  their  own 
fustians.  The  constant  progress  of  the  society  is  best 
illustrated  by  the  following  table: 

CAPITAL. 


Year. 

Members. 

Shares. 

Loan. 

Reserve. 

Sales. 

Profits. 

1870 

1880 

95 

384 
684 
732 
742 
746 
769 
797 

83 
15,693 
21,764 
22,399 
23,749 
24,497 
24,904 
25,845 

£3 
3,065 
9,081 
3,979 
9,840 
8,652 
8,770 
6,771 

£556 
1,595 
1,427 
1,937 
2,610 
2,890 
3,859 

£55 
18,625 
38,794 
40,178 
39,578 
39,991 
40,317 
43,569 

£3 
1,774 
3,499 
3,723 
5,118 
4,427 
4,171 
5,185 

1890 

1891 

1892 

1893 

1894 

1895 

At  first,  all  profits  accruing  to  workers  are  accredited 
to  share  account,  until  they  have  each  £20  of  stock  in  the 
association.  In  1894  the  results  of  .business  were  as  fol- 
lows: The  total  amount  paid  to  workers  as  wages  was 
£12,851,  and  the  amount  of  profit  to  workers  was  £642, 
computed  on  the  basis  of  one  shilling  in  the  pound  for 
wages  paid.  The  average  number  of  workers  during  the 
year  was  294.  Of  the  797  members  on  the  books  at  the 
close  of  1895,  297  were  workers,  300  were  cooperative 
societies,  and  200  were  outside  shareholders.  The  capital 
stock  was  held  as  follows:  workers,  £7,398;  cooperative 
societies,  £10,415 ;  outside  shareholders,  £8,032. 

Nearly  all  of  the  cooperative  societies  divide  their 
profits  among  purchasers  according  to  the  amount  of  the 
purchase.  A  certain  per  cent,  is  given  to  capital,  a  certain 
wage  and  profits  to  labor,  and  a  certain  per  cent,  to  cus- 
tomers. More  than  this,  certain  amounts  are  set  aside 
for  education,  insurance,  care  of  the  sick,  etc.  Thus,  in 
1895  the  society  described  above  devoted  £60  to  education. 
It  was  one  of  the  oldest  societies  formed.     Amonoj  the 


ECONOMICS. 


201 


modern  societies  much  more  attention  is  paid  to  educa- 
tion and  miscellaneous  expenditures.  Many  of  the  manu- 
facturing cooperative  societies  have  stores  of  their  own^ 
or  else  make  sales  in  connection  with  other  cooperative 
stores.  Thus,  the  Kettering  Cooperating  Boot  and  Shoe 
Manufacturing  Society  was  established  in  Kettering^ 
where  there  was  a  cooperative  store  of  3,070  members 
in  1894,  having  an  annual  trade  of  £57,613.  The  manu- 
facturing society,  after  providing  for  interest  on  capital 
and  depreciation,  divided  the  gross  profits  as  follows: 
40  per  cent,  to  workers,  divided  pro  rata  on  wages  paid; 
40  per  cent,  to  customers,  divided  pro  rata  on  purchases; 
5  per  cent,  to  managing  committee;  5  per  cent,  to  provi- 
dent fund;  2 J  per  cent,  to  educational  purposes;  and 
7J  per  cent,  to  capital  reserve.  The  society  is  managed 
by  a  committee  of  twelve,  chosen  by  the  shareholders. 
Each  member  is  required  to  hold  five  shares,  and  may 
not  hold  more  than  twdnty-five.  After  reaching  that 
amount,  any  further  addition  he  makes  to  this  investment 
is  credited  to  loan  account  to  the  extent  of  £25,  receiving 
five  per  cent,  per  annum  and  not  sharing  in  the  bonus 
on  transferable  shares.  The  business  of  this  establishment 
has  grown  since  1889  from  £3,588  to  £26,255,  in  1895. 
The  growth  of  the  entire  cooperative  enterprise  is  best 
illustrated  by  the  following  table: 


1883. 

1893, 

1891. 

15 
£160,751 

109 
£1,292,550 

120 
£1,371,424 

103,436 

9,031 

114 

8,917 

639,884 
67,663 

2,984 
64,679 

8,283 

799,460 

68.987 

3,135 

65.852 

8.751 

Number  of  societies  . . 

Sales  for  the  year 

Capital  —  share,  loan, 

reserve   , 

Profits 

Losses  

Net  profit   

Profit  to  labor   


155 

£1,859,876 

915,302 

94,305 

2,296 

92,109 

14,235 


*  l>ist,ributive  and  Productive  Cooperation  have  continued  to  develop  in  England. 


202 


ECONOMICS. 


Cooperation  in  the  United  States. 

The  principle  of  cooperation  in  the  United  States  has 
been  used  in  very  many  different  forms.  Communistic  so- 
cieties have  been  established  on  a  religious  basis  which 
have  involved  the  principle  of  cooperation  both  productive 
and  distributive.  Very  many  other  experiments  have  been 
tried  for  the  purpose  of  building  a  complete  social  com- 
munity like  the  Brook  Farm  experiment  in  Xew  England 
and  the  Icarian  community  in  Iowa,  and  in  nearly  every 
instance  the  philosophical  or  religious  element  entered 
in.  More  than  this,  the  underlying  principle  was  to 
control  the  entire  life  of  the  community, — religious, 
social,  political,  and  economical. 

The  two  great  movements  of  distributive  cooperation 
in  the  United  States  were  those  of  the  Grange  and  the 
Farmers'  Alliance.  The  Grange,  which  was  organized 
in  1866  and  received  its  greatest  impulse  about  ten 
years  later,  established  distributive  cooperative  stores  in 
nearly  every  State  in  the  Union.  These  stores  were  to 
be  owned  and  controlled  by  the  farmers  of  their  several 
communities,  to  order  their  goods  directly  from  the  manu- 
facturer, and  thus  do  away  with  the  so-called  middlemen 
and  thus  realize  a  margin  of  consumers'  profits  to  the 
members  of  the  association  controlling  the  store.  These 
stores  met  with  varying  success,  a  large  number  of  them 
finally  ending  in  total  disaster.  Only  a  few,  which  had 
a  strong  corporate  existence  and  had  entered  somewhat 
into  the  nature  of  monopoly,  were  enabled  to  survive 
the  stress  of  competition.  There  are  many  causes  to  which 
the  failure  of  these  cooperative  institutions  may  be  traced. 
Among  the  chief  of  these  are  found  the  failure  of  man- 


ECONOMICS.  203 

agers  to  understand  their  business,  the  lack  of  union  among 
the  farmers  in  the  association,  the  competition  of  more 
strongly  organized  firms  with  plenty  of  capital,  and 
finally,  the  political  trend  of  the  association. 

The  Farmers'  Alliance,  which  sprang  up  somewhat 
later,  was  but  a  revival  of  the  old  Grange  movement; 
but  the  same  principles  were  employed,  which  were  to 
a  great  extent  in  accordance  with  the  methods  of  the  Roch- 
dale Pioneers.  Indeed,  all  distributive  cooperation  wher- 
ever successful  has  worked  upon  this  plan.  The  causes 
of  the  failure  of  the  Farmers'  Alliance  were  in  a  measure 
the  same  as  those  of  the  failure  of  the  old  Grange  stores, 
with  the  exception  that  politics  had  a  wider  influence  in 
the  latter  than  in  the  former,  and,  it  may  also  be  said^ 
from  the  fact  that  there  was  less  need  of  the  Farmers' 
Alliance  store  than  of  the  old  Grange  stores.  For  when 
the  latter  were  started  goods  were  sold  excessively  high 
in  the  West,  and  agents'  profits  w^ere  extortionate ;  in  the 
former,  owing  to  cheap  transportation  and  excessive  com- 
petition, prices  of  goods  in  the  West  were  not  too  high. 
It  must  be  conceded  that  among  the  beneficial  influences 
of  the  old  Grange  store  is  that  of  the  reduction  of  prices, 
and  the  more  direct  communication  of  retailers  and  con- 
sumers with  the  wholesalers  and  manufacturers.  A  great 
service  was  performed  in  this  way,  not  to  mention  other 
services  of  increasing  the  intelligence  and  the  political 
and  social  union  of  farmers. 

Productive  cooperation  in  the  United  States  has  many 
brilliant  examples  of  success,  and  many  more  of  wretched 
failure.  Wherever  there  has  been  a  fair  market  for  goods 
and  excellent  management  in  business,  these  cooperative 
institutions  have  had  a  reasonable  degree  of  success. 


204  ECONOMICS. 

In  the  establishment  of  any  manufacturing  business 
the  first  thing  to  be  considered  is  a  profitable  market.  If  a 
good  market  with  reasonable  profits  is  assured,  there  is 
an  opportunity  for  the  success  of  the  association.  But  it 
is  also  necessary  that  the  association  be  well  organized, 
and  that  good  managers  be  employed  in  carrying  on  the 
enterprise.  More  enterprises  have  failed  for  lack  of  busi- 
ness management  than  in  any  other  way.  While  there 
is  an  opportunity  to  save  time,  material,  tools,  and  to  fur- 
nish an  excellent  quality  of  goods  on  account  of  the  interest 
that  laborers  take  in  the  industry,  productive  cooperative 
establishments  have  frequently  furnished  a  cheap  grade 
of  goods,  owing  largely  to  a  lack  of  intelligent  manage- 
ment. Perhaps  the  most  successful  examples  of  productive 
cooperation  were  found  in  the  cooperative  coopering  es- 
tablishments of  Minneapolis,  where  there  was  a  ready 
market  for  the  finished  product,  and  where  an  industry 
could  be  started  with  a  small  amount  of  capital.  Other 
successful  examples  are  scattered  here  and  there  in  differ- 
ent industries  throughout  the  United  States. 

Aim  of  Cooperation. 
The  object  of  the  cooperative  society  is  to  interest  the 
laborer  directly  in  his  work;  to  encourage  him  in  the 
hope  of  reaping  the  share  of  the  profits  over  and  above 
the  fixed  charges ;  and  to  make  him  an  independent  busi- 
ness man  who  shall  have  a  right  to  determine  the  direction 
of  his  own  labor-power.  As  soon  as  his  interest  in  the 
business  is  established  he  takes  stock  and  becomes  a  share- 
holder, and  thus  receives  the  right  to  vote  in  the  manage- 
ment of  the  affairs  of  the  society.  He  now  becomes  care- 
ful of  tools  and  material;  is  saving  of  time  and  prevents 


ECONOMICS. 


205 


waste;  and  he  seeks  to  make  a  genuine,  finished  product. 
There  is  no  need  of  strikes  and  lockouts ;  the  war  between 
capital  and  labor  is  over,  because  the  capitalist  and  laborer 
are  the  same.  Their  common  interests  have  been  demon- 
strated. 

Whenever  productive  cooperation  can  be  successfully 
carried  on,  it  has  a  good  influence  on  society  at  large. 
Perhaps  the  labor  problem  can  be  solved  in  no  other  way 
except  in  giving  the  wage-earner  a  voice  in  shaping  his 
own  course,  in  managing  his  own  business,  in  employing 
himself  instead  of  being  hired  as  a  machine  and  thrust 
aside  at  the  will  of  the  employer.  The  idea  of  copartner- 
ship in  business  is  elevating  in  its  very  thought.  But  if 
productive  cooperation  should  succeed  until  a  large  number 
of  workers  should  be  employed  in  cooperative  enterprises^ 
these  enterprises  would  begin  to  compete  w4tli  each  other, 
and  there  would  be  competition  by  groups  instead  of  indi- 
viduals. What  then  would  happen  to  those  who  have  not 
yet  joined  a  cooperative  association?  They  must  of  ne- 
cessity suffer  the  results  of  grinding  competition,  which 
harms  not  their  more  fortunate  cooperative  brethren.  But 
the  time  may  come  when  these  also  will  be  forced  to  be- 
come cooperative.  The  great  difficulty  is  that  it  takes 
a  long  time  to  make  good  cooperative  workers.  It  is  a 
process  of  education — a  slow  process.  And  one  of  the 
chief  reasons  of  the  failure  of  cooperation  in  so  many 
instances  is  that  those  who  enter  it  are  not  cooperative 
men  by  nature  and  by  training.  Its  success  has  finally 
been  demonstrated  in  England,  and  it  helps  toward  the 
solution  of  the  labor  problem;  but  its  judgment  is  not 
final  or  conclusive. 


206 


ECONOMICS. 


Profit-Sharing. 

This  metliod  of  associated  work  differs  from  both  pro- 
ductive and  distributive  cooperation  in  the  fact  that  the 
business  management  is  still  in  the  hands  of  the  capitalist 
employer.  The  laborers  share  in  the  profits  of  the  concern, 
but  have  nothing  to  say  in  the  management  of  the  business. 
However,  in  recent  years  the  progress  of  all  successful 
profit-sharing  institutions  is  due  to  cooperation  in  which 
the  laborers  own  shares  of  stock  in  the  business  and  also 
have  a  voice  in  the  management  of  the  affairs. 

The  method  by  which  profit-sharing  is  carried  on  is  best 
illustrated  by  two  well-known  examples  in  America:  the 
Proctor  &  Gamble  Manufactory,  located  at  Ivorydale,  a 
small  town  in  the  suburbs  of  Cincinnati,  and  the  N.  O. 
[N'elson  Manufacturing  Company,  at  Laclair,  Illinois. 
The  former  employs  about  500  laborers  at  the  factory_, 
besides  another  hundred  in  the  Cincinnati  office  and  on 
the  road.  The  average  wages  of  men  is  $10  per  week; 
of  women,  $4.75;  of  boys,  $3.50  to  $7.  The  wages  are 
considered  only  fair,  yet  the  method  the  company  has 
adopted  of  dealing  with  its  employees  has  been  such  as  to 
prevent  any  discontent,  strike,  or  revolution.  The  firm 
was  established  in  1837,  but  the  plan  of  profit-sharing 
was  adopted  in  1887.  It  provided  for  the  distribution 
of  the  profits  among  the  employees  after  allowing  a  reason- 
able salary  of  $4,000  to  each  member  of  the  firm  who  was 
actually  engaged  in  conducting  the  business.  The  laborers 
were  to  receive  the  same  proportion  of  the  profits  as  the 
total  wages  bore  to  the  total  cost  of  manufacturing  and 
marketing  the  product.  For  example,  if  the  total  amount 
of  business  done  was  $100,000,  the  amount  of  wages  paid 
$20,000,  the  amount  of  profit  made  $10,000,  then  the 


ECONOMICS.  207 

total  cost  of  making  and  marketing  goods  was  $100,000 
less  the  profit  of  $10,000,  or  $90,000.  The  amount  of 
wages  paid  was  $20,000.  The  amount  of  profits  given  to 
employees  would  then  be  in  the  ratio  of  20,000  to  90,000, 
or  two-ninths,  and  the  proportion  to  the  firm  would  be 
as  70,000  to  90,000,  or  seven-ninths  of  the  profits.  The 
laborers'  proportion  of  the  profits  was  distributed  among 
them  in  accordance  with  the  amount  of  wages  earned  bj 
each.  This  plan  was  in  force  three  years,  during  which 
the  dividend  or  share  of  the  profits  averaged  12^  per  cent, 
of  the  wages. 

In  1890  the  firm  of  Proctor  &  Gamble  was  reorganized 
on  the  basis  of  the  payment  of  12  per  cent,  on  the  common 
stock,  if  this  amount  should  be  earned.  This  being  prac- 
tically the  same  rate  earned  by  the  employees  under  the 
old  plan,  it  was  an  easy  and  advantageous  arrangement 
to  adopt  a  plan  of  paying  employees  as  their  share  of 
profits  the  same  rate  of  dividend  upon  their  wages  as  was 
paid  upon  the  common  stock  of  the  company.  This  method 
was  adopted,  and  under  it  profit-sharing  is  now  carried 
on.  The  dividends  are  paid  semi-annually.  To  illustrate 
this:  suppose  a  man  earns  $500  a  year  in  wages;  he 
receives  in  addition  a  dividend  of  12  per  cent,  on  this 
amount,  or  $60.  The  man  that  has  $500  worth  of  stock 
in  the  company  also  receives  12  per  cent.,  or  $60.  Thus 
the  laborers  and  the  stockholders  are  upon  an  equitable 
basis.  All  employees  are  entitled  to  begin  to  share  in 
the  dividends  after  being  in  the  employ  of  the  company 
for  three  months ;  but  if  one  quits  work  or  is  discharged 
before  three  months'  febor  in  the  service  of  the  company 
he  receives  no  dividend.    At  first  the  laborers  were  divided 


208 


ECONOMICS. 


into  full  participants  and  half  participants  in  profits. 
This  was  not  found  to  be  desirable,  and  all  employees 
were  placed  on  the  same  basis.  'NoWy  fully  98  per  cent, 
of  the  laborers  participate  in  the  profits.  The  company 
reserves  the  right  to  deny  the  dividend  to  the  employee 
for  cause,  but  the  amount  of  this  unpaid  dividend  must 
be  paid  to  other  laborers,  and  does  not  go  to  the  stock- 
holders of  the  company. 

The  company  not  only  allows  sharing  in  the  profits,  but 
also  encourages  employees  to  acquire  a  part  of  the  capital 
stock.  Any  employee  may  obtain  a  share  of  the  common 
stock  upon  the  following  terms :  $10  at  the  time  of  appli- 
cation, the  balance  in  installments  of  not  less  than  $5  each. 
Upon  this  balance  he  must  pay  interest  at  the  rate  of  4  per 
cent,  per  annum.  In  the  meantime  all  dividends  declared 
upon  the  stock  accrue  to  the  purchaser.  But  the  certifi- 
cate of  stock  is  held  by  the  secretary  of  the  company  as 
trustee  for  the  subscriber  until  the  final  payment  is  made. 
There  have  been  up  to  date  about  seventy  or  eighty  shares 
taken  by  the  employees,  nearly  all  of  which  were  purchased 
at  prices  varying  from  $100  to  $128.  The  company  has 
under  consideration  a  plan  to  go  one  step  farther,  and 
guarantee  the  employees  who  hold  stock  against  loss  upon 
their  investment.  They  find  a  good  many  difiiculties  in 
the  way  of  the  practical  working  of  such  a  guaranty,  but 
hope  to  make  it  a  permanent  part  of  their  system. 

Another  important  feature  of  the  Ivory  dale  system  is 
the  pension  fund,  inaugurated  for  the  benefit  of  the  em- 
ployees. This  fund  is  created  by  setting  aside  the  sum 
of  $500  semi-annually,  half  of  which  amount  is  taken  from 
each  profit-sharing  dividend  and  one-half  is  paid  by  the 


ECONOMICS.  209 

Proctor  &  Gamble  Company.  The  management  of  the 
fund  is  in  charge  of  a  board  of  trustees  composed  of  em- 
ployees and  members  of  the  company.  A  pension  is 
granted  to  any  employee  who  has  been  in  the  continuous 
employment  of  the  company  for  not  less  than  seven  years 
when  partial  or  total  disability  to  work  has  been  caused  by 
sickness,  accident,  or  old  age ;  and  it  is  the  company's  in- 
tention so  far  as  possible  to  provide  those  who  are  entitled 
to  pensions  with  such  work  as  they  can  readily  perform, 
at  such  wages  as  the  work  is  worth.  The  introduction 
of  the  pension  fund  is  of  recent  date,  but  on  January  J, 
1895,  there  was  $2,000  in  the  fund,  with  one  pensioner 
upon  the  rolls. 

One  other  economic  condition  is  found  in  the  building 
and  loan  associations,  which  have  enabled  a  few  to  build 
their  own  homes,  and  this  is  encouraged  by  the  company. 

The  attempt  to  improve  the  social  life  of  the  employees 
has  met  with  less  success.  Although  library,  reading- 
room  and  card-room  have  been  provided  free,  they  have 
not  met  with  the  success  anticipated  when  inaugurated. 
This  is  doubtless  owing  to  the  many  mutual-aid  clubs, 
which  furnish  greater  attractions  than  the  reading-room 
and  the  library.  In  seeking  enjoyment  laborers  have  a 
tendency  to  scatter  into  other  groups,  rather  than  to  asso- 
ciate among  themselves  in  a  single  group ;  also,  the  widely 
separated  position  of  the  homes  renders  compact  grouping 
almost  impossible,  as  about  one-half  live  near  Ivorydale 
and  the  rest  live  in  the  city  of  Cincinnati. 

When  an  employee  is  injured  or  sick,  the  physician 
employed  by  the  company  cares  for  iiim.  The  company 
also  continues  the  wages  of  the  injured  employee  through 
—14 


210  ECOITOMICS. 

the  period  of  his  disability,  and  seeks  to  emphasize  the 
fact  that  employer  and  employee  are  associated  for  a  com- 
mon interest.  Many  methods  are  taken  by  the  managers 
to  show  their  interest  in  the  employees.  Thus,  on  Christ- 
mas day,  1893,  three  hundred  turkeys  were  distributed 
among  the  heads  of  families.  And  after  each  semi-annual 
pay-day,  in  January  and  July,  a  day  is  set  apart  for  a  gen- 
eral celebration,  in  which  employers  and  employees  engage. 
The  day  is  taken  up  with  games,  sports,  and  general  jollifi- 
cation. 

The  entire  profit-sharing  enterprise  is  established  on 
a  business  basis.  Although  altruistic  motives  may  have 
been  at  the  foundation  of  this  scheme,  it  was  originated 
for  the  improvement  of  the  business  with  the  belief  that 
the  benefit  of  the  employee  was  in  the  end  to  be  for  the 
benefit  of  the  employers.  Most  of  the  laborers  being  un- 
skilled at  this  time  and  below  the  average  intelligence  of 
skilled  workmen,  it  was  difficult  to  persuade  them  it  was 
not  a  scheme  to  get  more  work  out  of  them  for  a  corre- 
sponding equivalent.  Also,  they  were  disposed  to  take 
the  dividend  as  a  matter  of  course  and  spend  it  freely 
and  sometimes  foolishly.  But  time  and  experience  have 
dispelled  this  idea.  The  success  of  profit-sharing  there, 
as  elsewhere,  is  a  matter  of  education,  and  many  ef- 
forts of  profit-sharing  have  failed  elsewhere  simply  be- 
cause the  employers  failed  to  remember  that  the  em- 
ployees must  be  educated  up  to  it.  Patience  as  well  as 
•justice  is  required  for  success.  During  the  first  two 
years  the  profit-sharing  was  not  a  success  as  a  money- 
making  investment,  but  as  the  men  became  more  and  more 
convinced  that  they  were  treated  with  justice  they  became 
more  and  more  careful  and  more  intelligent  in  the  work. 


ECONOMICS. 


211 


until  it  is  plainly  demonstrated  and  freely  admitted  that 
the  saving  is  much  in  excess  of  the  sums  paid  to  wage- 
earners  as  profits. 

The  success  of  the  plan  has  exceeded  the  expectations 
of  the  company.  The  gain  is  in  the  saving  of  time,  in 
the  diminishing  of  material,  in  making  a  better  quality 
of  wares,  in  keeping  men  of  experience,  and  finally,  a 
saving  of  oversight.  These  are  the  principles  which  have 
been  maintained  by  the  advocates  of  profit-sharing,  and 
it  is  gratifying  to  find  that  they  agree  with  the  experience 
of  those  who  have  carried  it  out.  There  have  been  no 
strikes  or  labor  troubles  of  any  kind  at  these  works  since 
this  plan  has  been  in  force.  Employees  remain  longer 
in  the  service  of  the  company,  and  it  is  very  seldom  that 
a  man  is  discharged  on  account  of  lack  of  work.  It 
demonstrates  that  the  interests  of  the  employer  and  em- 
ployee are  the  same,  and  any  warfare  between  the  two 
classes  is  an  unnatural  warfare  and  works  against  the 
interests  of  both  parties  engaged  in  it. 

Another  very  important  example  of  profit-sharing  is 
furnished  by  the  E^.  O.  E^elson  Manufacturing  Company^ 
a  corporation  for  the  manufacture  and  sale  of  plumbing 
goods,  steam  goods,  and  machinery.  The  firm  was  first 
established  in  187 Y,  incorporated  in  1883,  and  began 
profit-sharing  in  1886.  Its  factories  are  in  St.  Louis, 
Missouri,  Mound  City,  Illinois,  and  Laclair,  Illinois.  The 
number  of  employees  varies  from  400  to  500,  and  the 
wages  range  from  $1.25  to  $1.50  per  day  for  common 
labor,  and  from  $2  to  $2.50  per  day  for  skilled  mechanics. 
The  company  runs  full  time,  with  the  possible  reduction 
to  three-fourths  time  for  perhaps  a  month  in  midwinter. 


212  ECONOMICS. 

About  one-half  of  the  company's  works  are  located  at 
Laclair.  Here  the  factories  are  well  built,  heated  with 
steam  and  lighted  with  electricity.  The  company  owns 
125  acres  of  land,  15  of  which  are  reserved  for  factory 
uses  and  110  for  residence  purposes.  There  is  no  attempt 
to  build  a  model  town,  as  there  are  no  models  for  houses 
or  modes  of  action  for  people.  It  was  held  that  in  every 
respect  life  should  be  as  free  from  restraint  as  on  a  farm. 
But  the  streets  are  well  laid  out.  They  are  paved  with 
cinders  and  sprinkled  in  dry  weather.  Plank  sidewalks 
prevail  where  needed,  and  shade  trees  have  been  planted 
on  all  the  streets.  Water  and  street  lights  extend  wher- 
ever there  are  dwellings. 

The  company  has  made  it  possible  for  employees  to 
purchase  land  at  a  very  low  rate  and  build  their  own 
homes,  paying  for  them  in  monthly  payments.  Should 
a  person  desire  to  move  from  the  town,  the  company 
takes  the  property  from  him  without  his  loss. 

The  plan  of  profit-sharing  adopted  varies  somewhat 
from  that  of  the  example  just  given.  It  sets  aside  one- 
tenth  of  the  profits  for  a  reserve  fund,  one-tenth  for  a 
provident  fund,  and  one-twentieth  for  an  educational 
fund;  the  remainder  is  divided  equally  between  em- 
ployers and  employees.  The  reserve  fund  was  set  apart 
to  meet  the  loss  of  a  bad  year,  and  to  equalize  dividends 
when  profits  were  small.  The  provident  fund  was  created 
to  take  care  of  the  sick  and  disabled  and  the  families  of 
deceased  laborers.  This  latter  fund  is  in  the  hands  of  a 
committee  of  five  of  the  employees,  elected  by  the  em- 
ployees themselves.  Special  rules  are  made  for  the  con- 
trol of  the  expenditure  of  this  fund,  so  as  to  meet  all 


ECONOMICS. 


213 


tlie  requirements  of  tlie  capitalist.  There  are  no  conditions 
attached  to  employment  and  profit-sharing  except  a  man's 
capacity  for  work.  There  are  no  agreements  respecting 
unions,  time  of  service,  nor  the  manner  of  quitting. 
Finally,  the  manner  of  division  was  modified  so  as  to 
yield  2  per  cent,  on  wages  to  every  one  per  cent,  on  capital, 
and  the  earlier  practice  of  setting  aside  10  per  cent,  for 
provident  fund  and  5  per  cent,  for  educational  fund  was 
displaced  by  paying  out  whatever  was  necessary  for  these 
funds  and  charging  the  same  to  gross  profits. 

The  results  of  the  first  year's  business  after  profit- 
sharing  was  adopted  gave  a  dividend  of  5  per  cent,  on 
wages ;  second  year,  10  per  cent. ;  third  year,  10  per  cent. ; 
fourth  year,  8  per  cent. ;  fifth  year,  10  per  cent. ;  sixth 
year,  8  per  cent. ;  seventh  year,  4  per  cent. ;  and  in  the 
eighth  year,  which  was  1893,  no  dividend  was  declared. 
The  total  dividends  paid  to  wage-earners  as  their  share 
of  divided  profits  has  been  $65,000,  or  an  average  of  9 
per  cent,  on  wages  paid.  In  the  beginning,  dividends 
were  payable  in  cash  or  the  stock  of  the  company;  but 
in  recent  years,  in  order  to  make  a  solidarity  between 
capital  and  labor,  the  company  insists  that  all  dividends 
shall  be  paid  in  the  stock  of  the  company.  Perhaps 
there  is  no  other  feature  that  binds  the  employees  and 
employers  so  closely  together  as  a  participation  in  divi- 
dends and  sharing  in  the  profits  of  the  concern. 

One  other  economic  condition  here  is  worthy  of  especial 
attention;  this  is  the  cooperative  store,  which  was  opened 
in  May,  1892,  and  incorporated  under  the  laws  of  Illinois 
for  the  purpose  of  furnishing  consumers  with  goode  at 
moderate  rates.     The  laws  under  which  it  is  incorporated 


214 


ECONOMICS. 


provide,  among  other  things,  that  no  one  shall  hold  more 
than  one  share  or  cast  more  than  one  vote,  and  that  all 
profits  above  interest  shall  be  divided  among  members. 
The  capital  stock  is  two  thousand  shares  of  $50  each. 
The  business  consists  in  buying  and  selling  any  class  of 
goods  required  by  members,  and  manufacturing.  It  is 
under  the  control  of  a  board  of  directors,  elected  annually 
by  the  members.  All  business  is  conducted  on  a  cash  basis. 
All  goods  are  retailed  to  members  or  non-members  at  the 
ruling  prices  as  indicated  by  the  actual  prices  prevail- 
ing in  stores  in  the  vicinity.  At  the  end  of  each  quarter 
the  books  are  balanced  and  dividends  declared  according 
to  the  recommendation  of  the  directors  and  the  approval 
of  the  stockholders,  in  proportion  to  the  amount  of  the 
purchases  of  each  individual  during  the  quarter.  Only 
half-rate  dividends  are  given  to  non-members.  The  divi- 
dends have  varied  from  10  per  cent,  to  20  per  cent.,  except 
in  one  quarter  when  there  was  no  profit  at  all.  The 
business  is  carried  on  entirely  upon  an  economic  basis. 

Some  attempts  aave  beeu  made  to  improve  the  social 
condition  of  the  laborers.  There  are  free  billiard-rooms 
and  bowling-alleys,  a  small  grove  where  swings  and 
benches  are  provided,  and  a  baseball  ground.  The  com- 
pany maintains  a  landscape  gardener,  and  keeps  a  green- 
house from  which  residents  are  supplied  free  of  charge 
with  as  many  flowers  as  they  wish  to  set  out  and  care  for. 
A  well-organized  literary  society  is  in  existence,  where 
occasional  lectures  by  distinguished  men  are  given.  There 
is  a  well-trained  band  which  gives  open-air  concerts  during 
the  week  on  the  grounds  adjoining  the  club-house.  A 
library  containing  about  600  carefully  selected  books  is 


ECONOMICS.  215 

free  to  all.  A  large  number  of  the  readers  reside  outside 
of  Laclair.  There  are  provided  also  a  kindergarten  and 
public  schools.  In  the  school,  students  are  admitted  on 
part  time  and  allowed  to  work  in  the  shops  or  on  the  farm 
during  a  portion  of  the  day,  for  which  they  receive  com- 
pensation. 

As  to  the  results  of  the  entire  system  as  practiced  by 
the  ]^.  O.  Nelson  Company,  it  is  the  opinion  of  the  man- 
agers that  the  waste  of  time  and  material  has  been  greatly 
reduced;  that  there  has  been  a  better  attention  to  busi- 
ness; and  that  there  has  been  established  a  solidarity 
of  employer  and  employee  in  a  common  business  in  which 
they  are  mutually  interested,  from  which  they  draw  mutual 
profits. 

The  brief  statistical  presentation  of  these  examples  of 
attempts  to  solve  the  labor  problem  reveals  to  us  the  funda- 
mental proposition  in  the  process  of  its  solution,  namely, 
that  as  interests  of  capital  and  labor,  of  employer  and 
employee,  are  common  and  all  warfare  between  them  is 
unnatural,  any  system  which  will  tend  to  establish  this 
fact  will  have  within  itself  the  basis  of  success,  and  any 
system  which  fails  to  establish  this  certainly  will  not 
succeed.  There  must  be  established  a  solidarity  of  in- 
terests of  employer  and  employee  upon  an  economic  basis. 
There  must  be  established  a  feeling  that  their  interests 
are  common.  Having  established  this,  and  acting  upon 
it  on  the  basis  of  absolute  justice,  any  rational  plan  has 
the  probability  of  success.  If  this  be  continued  further 
in  the  social  life,  so  that  the  employer  and  employees 
mingle  together  on  a  common  basis,  the  barriers  now  exist- 
ing between  the  classes  will  be  broken  down  and  there 


216 


ECONOMICS. 


will  be  a  common  sympathy  and  trust  between  them. 
From  the  foregoing  examples  we  may  infer  that  a  success- 
ful solution  of  the  problem  rests  upon  the  observance  of 
the  following  principles : 

1.  The  laborer  must  have  an  economic  interest  in  the 
product  of  his  own  industry  to  insure  care  of  tools,  saving 
of  time,  saving  of  material,  and  the  creation  of  a  better 
quality  of  goods. 

2.  He  should  be  received  into  total  or  partial  partner- 
ship in  the  management  of  the  business  through  stock 
ownership  or  some  similar  means. 

3.  Both  employees  and  employers  should  cooperate  in 
furnishing  means  of  social  improvement. 

4.  While  working  together  the  utmost  sympathy  should 
prevail  between  the  employer  and  the  employee,  and  at 
the  same  time  due  respect  should  be  given  to  the  respective 
position  and  rights  of  each  class. 

5.  In  order  to  bring  about  the  above  conditions  the 
employers  must  cease  to  combine  against  the  interests 
of  laborers  and  the  latter  must  cease  to  combine  against 
the  former. 

6.  To  gain  the  confidence  of  the  public  in  all  efforts 
to  their  owm  improvement,  laborers  must  cease  to  militate 
against  members  of  their  own  class,  and  recognize  the 
rights  of  all  men  to  work  for  wages  according  to  their 
own  choice. 

7.  And  finally,  it  may  be  said,  to  accomplish  the  above 
there  must  be  a  constant  education  of  both  employers  and 
employees  concerning  the  rights,  duties  and  limitations  of 
each  class  and  the  mutual  interests  of  each  class  as  if 
no  class  distinction  existed  either  on  an  economic  or  social 


ECONOMICS.  217 

basis.     And  this  leads  to  consideration  of  individual  char- 
acter as  causation  in  social  improvement. 

References:  Gilman,  N.  P.,  Profit-Sharing;  Shaw,  Albert, 
Cooperation  of  a  Western  City ;  Warner,  Amos  G.,  Three  Phases 
of  Cooperation  in  the  West. 


218 


ECONOMICS. 


CHAPTEK  VII. 

LABOR  ORGANIZATIONS. 

Origin  of  Labor  Organizations. 

A  reference  to  the  origin  and  history  of  labor  organi- 
zations will  show  that  they  have  had  a  natural  and  essen- 
tial development.  Just  as  we  have  the  development  of 
government  itself  or  the  natural  process  of  the  evolu- 
tion of  corporations  or  of  other  social  or  economic  organi- 
zations, so  we  find  in  the  present  existence  of  labor  organi- 
zations the  natural  outcome  of  the  economic  conditions  of 
the  world  during  the  past  two  centuries. 

The  American  Trade  Union  has  a  representative,  in 
idea  at  least,  in  the  ancient  guild.  The  citizens  of  the 
towns  in  the  Middle  Ages  formed  themselves  into  guilds 
in  order  to  defend  themselves  against  the  attacks  of  law- 
less barons  of  the  country.  The  whole  body  of  citizens 
were  united  against  the  robber  outlaws  who  sought  to 
exact  from  them  all  the  taxes  and  fines  which  they  could 
take  by  means  of  persuasion  or  coercion.  But  as  soon 
as  the  town  guild  had  obtained  its  independence,  it  was 
ruled  by  a  body  of  noblemen,  who  in  turn  concluded  that 
they  were  the  town,  and  opposed  all  of  the  common  trades- 
men and  craftsmen  by  their  arbitrary  and  high-handed 
procedure.  Then  history  repeated  itself  in  the  picture  of 
the  man  who  struggled  to  free  himself  from  his  oppress- 
ors, as  these  oppressed  craftsmen  now  formed  themselves 


ECONOMICS.  219 

into  guilds  and  governed  the  towns  themselves  for  many 
generations. 

These  craft  guilds  represented  the  union  of  all  trades- 
men of  a  single  craft  in  one  organization.  Each  guild 
included  masters,  apprentices,  and  laborers.  There  was 
no  division  here  between  masters  and  workmen;  they 
were  all  of  one  body  and  their  interests  were  common.  In 
this  early  time,  very  little  capital  was  necessary  for  pro- 
duction, and  the  distinction  between  the  capitalistic  em- 
ployer and  hired  labor  scarcely  existed.  Each  craftsman^ 
with  what  little  capital  he  commanded,  worked  with  his 
own  hands  alongside  of  his  apprentices  and  laborers.  The 
servants  were  generally  hired  by  the  year,  and  the  appren- 
tices were  bound  by  the  year;  so  it  was  to  the  master's 
interest  to  keep  everybody  at  work  whether  there  was  a 
demand  for  goods  or  not.  So  he  did  not  wait  for  orders 
to  come  in,  but  kept  manufacturing  and  placing  the  goods 
upon  shelves  as  a  stock  in  trade.  The  apprentices,  after 
having  learned  the  trade,  frequently  left  their  master  and 
started  up  a  new  manufactory  for  themselves.  Living 
this  quiet,  unassuming,  peaceful  life,  the  craft  guilds  were 
united  in  an  association  which  tended  to  establish  honesty 
of  work  and  brotherly  kindness;  to  defend  the  oppressed 
and  to  relieve  the  distress  of  the  less  fortunate. 

As  time  went  on,  complexity  of  trade  increased,  more 
capital  was  required  in  production,  and  the  craftsman  now 
became  the  capitalistic  master;  for  besides  his  servants 
and  apprentices  and  members  of  his  own  family,  he  hired 
laborers  or  journeymen  who  worked  for  wages.  In  this 
situation,  it  became  a  question  to  be  settled  partly  by  the 
state  and  partly  by  the  craft  guild  as  to  how  many  ap- 


220 


ECONOMICS. 


prentices  a  master  might  have,  and  also  how  many  hired 
laborers  he  should  have,  what  rate  of  wages  he  should  pay 
them,  and  how  many  hours  they  should  work.  As  wealth 
increased  the  masters  ceased  to  work  with  their  own  hands, 
and  their  laborers  became  a  distinct  class  by  themselves. 
This  change  Avas  brought  about  slowly,  but  surely,  which 
separated  the  employer  from  the  employee.  This  social 
separation  of  the  employer  and  the  employee  was  greatly 
facilitated  by  the  discoveries  and  inventions  occurring  in 
the  later  half  of  the  eighteenth  century.  These  are 
epitomized  as  follows  by  Professor  Marshall: 

"Between  the  years  1760  and  1770  Koebuck  began  to 
smelt  iron  by  coal;  Brindley  connected  the  rising  cities 
of  manufactures  with  the  sea  by  canal;  Wedgwood  dis- 
covered the  way  of  making  earthenware  cheaply;  and 
while  Hargreaves  invented  the  spinning- jenny,  Arkwright 
utilized  Wyatt's  and  High's  inventions  for  spinning  by 
rollers,  and  Watt  invented  the  condensing  steam  engine. 
Crompton's  mule  and  Cartwright's  power  loom  cam.e  short- 
ly after.  These  inventions  took  manufacture  away  from 
houses  and  cottages  and  gave  it  to  factories  and  large 
workshops.  Armies  of  men  came  together  under  the  man- 
agement of  capitalist  employers,  and  the  modern  wage 
question  made  its  first  appearance.'^ 

It  seems  that  many  of  these  employers  were  harsh, 
overbearing,  cruel  men,  and  under  the  new  conditions  they 
cared  little  or  nothing  for  the  condition  of  the  laborers 
under  them.  It  was  not  long  before  great  factories  requir- 
ing much  capital  were  built,  and  there  were  congregated 
in  them  large  bodies  of  workmen  under  a  common  over- 
seer. The  work  of  separating  the  capitalist  from  the 
laboring  class  was  completed;  the  struggles  of  the  labor- 


ECONOMICS. 


221 


ers  against  the  employers  had  now  begun.  And  what- 
ever sympathy  we  may  have  for  the  modern  laborer  iii 
his  attempts  to  secure  kind  treatment  and  justice,  what- 
ever pity  we  may  have  for  his  ignorance  or  misguided 
ambition,  no  one  can  read  the  history  of  the  struggles  of 
the  laboring  classes  of  this  period  without  deploring  the 
misery  of  their  situation.  The  laborers  were  thrown  into 
evil  conditions  for  which  they  were  not  responsible ;  with 
fourteen  hours  of  labor  in  great  factories  with  impure 
air  and  insufficient  light,  with  poor  wages  and  harsh  treat- 
ment, they  began  to  look  around  for  some  way  of  redress. 
And  the  first  means  which  they  took  was  the  attempt 
to  revive  some  old  legislation  respecting  labor,  and  they 
urged  the  enforcement  of  two  old  laws  passed  two  cen- 
turies before,  which  limited  the  number  of  hours  of  labor, 
the  number  of  employees  each  master  weaver  might  have, 
and  held  that  the  number  of  apprentices  in  a  shop  should 
not  exceed  by  more  than  three  the  number  of  journeymen, 
and  which  reiterated  the  law  that  wages  should  be  period- 
ically fixed  by  the  justice  of  the  peace. 

ISTow  the  first  united  efforts  were  for  the  purpose  of 
petitioning  Parliament  to  enforce  these  old  laws.  In  this 
the  laborers  failed,  and  were  convinced  finally  that  they 
would  look  in  vain  to  Parliament  for  redress  of  grievances. 
Then  they  began  to  form  unions  of  their  own,  uniting 
in  sympathy,  mutual  aid,  and  common  defense  against 
their  employers.  At  first  there  were  many  laws  passed 
against  their  assemblage  for  the  purpose  of  labor  agitation; 
laws  making  it  a  misdemeanor  for  a  person  to  refuse  to 
work  when  wages  were  offered  him,  thus  precluding  the 
right  to  strike.     Is  it  any  wonder  that,  born  in  those 


222 


ECONOMICS. 


troublesome  times,  the  unions  became  harsh  and  bigoted 
and  narrow-minded  in  their  conception  of  their  own 
interests  ?  The  laws,  indeed,  ^^had  made  a  crime  of  what 
was  no  crime" — the  crime  to  refuse  to  work  in  order  to 
obtain  higher  wages.  Thej  knew  that  this  law,  and  all 
laws  respecting  labor,  were  full  of  class  injustice,  and 
many  of  them  being  rude,  ignorant  men,  they  were  in  turn 
unjust,  and  as  fast  as  power  came  to  them  were  ready 
to  be  unfair.  If  we  glance  at  the  unions  of  to-day  we  find 
a  great  contrast  between  the  leaders  of  these  old  unions 
in  their  bigoted,  narrow,  and  cruel  lives,  and  leaders  of 
the  modern  union;  and  the  rank  and  file  of  to-day  is 
far  in  advance  of  the  rank  and  file  of  the  ancient  union. 
IsTevertheless,  to-day  we  find  at  times  a  spirit  of  the  same 
harsh,  narrow,  bigoted,  and  short-sighted  life, — the  folly^ 
ignorance,  and  selfishness  cropping  out  in  the  modern 
union.  But  this  is  usually  in  the  smaller  unions,  belong- 
ing to  the  weaker  part  of  the  organization,  and  are  con- 
ditions which  are  greatly  deplored  by  the  intelligent 
laborers  and  liberal  leaders,  conditions  which  are  rap- 
idly changing  as  intelligence  increases  among  laborers. 

Development  of  Trade  Unions. 

From  this  time  on,  trade-unionism  developed  steadily 
in  England,  but  not  rapidly,  until  the  year  1830,  when, 
all  restrictions  being  removed,  unions  sprang  into  being 
at  once  and  as  necessary  organizations.  It  appears  from 
this  view  of  the  early  origin  of  trade-unionism,  that  it 
was  a  natural  development,  and  that  the  capitalistic  class 
on  one  hand  is  as  responsible  for  its  existence  as  the 
laborers  on  the  other.     It  is  an  expression  of  the  natural 


ECONOMICS. 


223 


right  that  must  hold  everywhere,  to  organize  for  the 
sake  of  self -protection ;  just  as  the  organization  of  capi- 
tal in  production  was  a  normal  process  of  economic  evolu- 
tion, so  was  that  of  the  organization  of  labor.  In  reality, 
the  employers  of  labor  are  not  more  responsible  for  the 
condition,  of  labor  than  are  laborers  for  the  condition  of 
employers,  except  that  capital  took  the  initiative  in  or- 
ganization. 

After  trade  unions  had  been  established,  the  next  step 
in  their  development  was  the  formation  of  amalgamated 
associations.  There  sprang  up  in  England  and  America 
a  tendency  to  unite,  in  federal  assembly,  all  the  principal 
unions  for  a  common  cause.  This  has  been  going  on 
rapidly,  and  there  has  been  in  the  past  thirty  years  a 
strong  movement  to  make  one  solid  organization  through- 
out Europe  and  America.  On  the  one  hand,  the  Knights 
of  Labor  have  stood  for  this  organization  on  the  basis  of 
uniting  all  unions  and  assemblies  in  one  great  body,  upon 
a  political  basis  for  power,  not  only  at  the  polls,  but  else- 
where, that  they  might  force  all  opposition  to  yield  to  the 
demands  of  labor.  On  the  other  hand,  there  is  a  great 
American  Federation  of  Labor,  which  desires  to  federate 
trade  unions  and  to  leave  each  one  in  possession  of  its 
own  local  affairs,  yielding  to  local  government.  There 
has  been  a  little  friction  in  the  past  between  these  two 
great  organizations,  the  former  standing  for  imperialism, 
the  schedule  of  government  absolute  in  nature,  and  the 
other  standing  for  local  self-government  of  each  trade 
assembly.  There  has  also  been  an  amalgamation  of  all 
unions  in  the  same  branch  of  industry  throughout  the 


224  ECONOMICS. 

United  States,  such  as  the  International  Typographical 
Union,  which  was  instituted  in  1850. 

In  the  United  States  the  first  trade  union  was  formed 
by  the  tailors  in  Kew  York,  in  1806.  But  labor  agitations 
continued  in  ^ew  York  at  intervals,  only  a  few  unions 
being  formed  down  to  the  year  1830.  From  that  time 
on  until  1851,  we  find  a  great  labor  movement  and  the 
constant  development  of  unions  of  different  kinds.  This 
received  a  strong  impulse  by  a  meeting  of  farmers  and 
mechanics  and  other  workmen  in  Boston  in  1831.  During 
this  period  mentioned  there  were  numerous  strikes  by  the 
various  unions,  and  strenuous  efforts  were  made  to  reduce 
the  hours  of  labor.  In  July,  1833,  the  workmen  of  the 
Thompsonville  carpet  factory  struck  for  an  advance  in 
wages,  and  the  carpet  company  sued  some  of  the  strikers 
for  conspiracy.  In  the  trial  by  jury  which  followed,  a 
verdict  was  given  for  the  laborers.  This  had  a  tendency 
to  encourage  strikes.  Then  followed  a  long  struggle  by 
the  trade  unions  for  the  right  to  exist.  The  matter  was 
finally  decided  in  their  favor,  and  victory  was  achieved. 
A  second  industrial  congress  convened  in  New  York  on 
June  10,  1847,  received  a  wide  representation,  and  organ- 
ized labor  was  recognized  as  an  institution  of  great  power 
and  entitled  to  a  position  in  the  industrial  world. 

But  while  this  period  of  which  I  am  speaking  was  the 
time  in  which  organizations  were  struggling  for  rights^ 
the  great  time  for  organization  and  progress  in  America 
began  in  1861,  and  has  continued  without  cessation  to 
the  present  time.  Now,  nearly  every  trade  in  America 
is  organized,  and  there  are  large  numbers  of  amalgamated 


ECONOMICS. 


225 


associations   besides   the   American   Federation   and   the 
Knights  of  Labor. 

During  the  summer  of  1894,  the  American  Railway 
Union,  under  the  leadership  of  Eugene  Y.  Debs,  came  into 
prominence.  Its  purpose  was  to  organize  all  railway  em- 
ployees into  one  body  and  to  precipitate  a  general  strike^ 
thus  blocking  the  wheels  of  industry  from  the  Atlantic  to 
the  Pacific.  How  nearly  the  plan  succeeded  we  are  all 
aware.  The  failure  of  this  for  a  time  gave  less  hope  to 
labor  leaders  in  the  efficacy  of  the  strike  as  a  means  of 
improving  the  condition  of  labor. 

Knights  of  Labor. 
In  addition  to  what  has  already  been  stated,  the  Knights 
of  Labor  are  an  organization  of  employees  both  skilled 
and  unskilled,  and  regardless  of  any  trade  or  occupation. 
The  aim  is  to  break  down  the  barrier  between  the  dif- 
ferent occupations  and  local  unions.  They  have  taken  a 
broader  view  of  the  social  organization  of  labor,  and  thus 
have  included  not  only  all  classes  of  laborers  in  their 
membership,  but  also  employers  and  professional  men. 
Their  prime  object  is  not  that  of  warfare  alone,  but  a 
complete  organization  of  all  the  productive  forces  of  in- 
dustry. They  hope,  by  showing  the  relations  of  labor  and 
capital  and  their  mutual  benefits,  to  demonstrate  that  there 
is  a  necessary  union  of  the  two  in  practical  work;  but 
they  also  claim  in  this  union  the  rights  and  privileges 
of  the  laboring  class.  They  have,  besides  a  general 
national  organization,  a  series  of  district  assemblies,  in 
which  a  considerable  number  of  trades  have  been  united 
in  a  common  federative  group.  The  Knights  of  Labor 
—15 


226  ECONOMICS. 

at  times  show  great  strength,  and  again  are  weakened  by 
strife  and  contention.  In  fact,  all  labor  organizations 
advance  and  recede  in  their  movements  with  the  condi- 
tion of  the  times,  certain  conditions  being  more  favor- 
able to  their  development  than  others. 

The  federation  of  the  trade  unions,  on  the  other  hand, 
has  been  at  enmity  with  the  Knights  of  Labor  for  several 
years,  the  trade  unions  representing  the  local  fighting  units 
of  organized  labor  and  always  contending  for  their  indi- 
vidual rights.  Consequently,  the  Knights  of  Labor  in 
their  attempts  to  break  down  all  class  distinction  find 
themselves  in  direct  opposition  to  the  practices  of  local 
assemblies. 

There  has  been  an  attempt  to  organize  all  laborers  into 
one  great  mass,  not  only  as  a  national  organization  but  also 
as  international,  so  that  when  a  strike  is  declared  it  shall 
be  for  the  whole  world,  and  industry  will  be  stopped  until 
terms  are  made  with  organized  labor.  Up  to  the  present 
this  seems  to  be  an  impossibility,  yet  we  do  see  a  growing 
tendency  that  way;  but  that  growing  tendency  is  also 
tempered  with  a  conservatism,  on  the  other  hand,  which 
would  prevent  any  such  radical  movement.  Should  it 
ever  come  to  a  test  of  this  kind,  the  so-called  employer, 
or  capitalistic  class,  could  endure  a  strike  longer  than 
the  employees  themselves.  For  indeed  at  present,  when 
one  branch  of  labor  is  striking,  it  can  be  supported  by 
another  that  is  earning  wages.  In  Australia  at  one  time 
nearly  all  laborers  were  organized,  so  that  industry  was 
practically  stopped.  Yet  the  laborers  were  finally  obliged 
to  yield,  although  with  certain  gains. 


ECONOMICS.  227 

Objects  of  Trade  Unions. 

The  first  and  fundamental  principle  of  trade  unions  is 
to  insure  a  just  recompense  to  labor  in  the  form  of  higher 
wages  or  shorter  hours.  The  larger  proportion  of  strikes 
that  have  taken  place  have  been  for  either  higher  wages 
or  shorter  hours.  The  unions  also  have  a  large  work  to 
do  in  protection  and  assistance  of  needy  fellow-laborers. 
This  has  become  one  of  their  fundamental  laws.  The 
third  object  is  the  improvement  of  the  social  conditions  of 
the  wage-earner  by  education  and  other  means.  In  the 
modern  trade  union  or  general  labor  organization  these 
are  the  fundamental  points  to  be  gained. 

But  it  must  be  admitted  that  in  many  of  their  attempts 
the  unions  have  failed,  as  do  all  organizations.  Indeed, 
the  state  in  which  we  live  is  sometimes  imperfect  and 
has  some  faults,  and  the  church  in  which  we  believe  has 
still  its  defects;  and  so,  when  people  censure  labor  or- 
ganizations, they  forget  that  these  new  organizations, 
which  have  sprung  up  according  to  natural  economic  laws, 
are  also  dependent  upon  the  same  vagaries  of  human  na- 
ture and  imperfections  of  human  government  as  are 
other  organizations,  and,  indeed,  that  ignorance,  selfish- 
ness, and  obtuseness  have  a  tendency  to  make  all  organi- 
zations imperfect,  and  frequently  unjust.  Nevertheless,  a 
large  number  of  those  who  have  opposed  labor  organiza- 
tions have  failed  to  consider  their  natural  reason  to  be,  and 
their  real  beneficial  effects.  It  is  true,  there  were  many 
reasons  for  attacking  the  unions  in  their  early  days,  but 
the  sensible  way  is  to  recognize  their  helpful  principles 
and  to  combat  their  abuses  as  we  do  those  of  the  church, 
the  state,  and  the  political  party. 


228 


ECONOMICS. 


Thorold  Rodgers,  in  his  work  on  wages,  in  speaking  of 
labor  organizations,  says:  ^^A  long  study  of  the  history 
of  labor  has  convinced  me  that  they  are  not  only  the  best 
friends  of  workmen,  but  the  best  assistance  for  employer 
and  the  public,  and  to  the  institution  of  these  associations 
political  economists  and  statesmen  must  look  for  the  solu- 
tion of  many  of  the  most  pressing  and  difficult  problems 
of  our  times."  This  is  rather  a  hopeful  view  of  the 
question.  IsTevertheless,  it  is  being  verified  to  a  certain 
extent  in  the  fact  that  employers  at  large  are  recognizing 
union  men,  and  as  a  rule  prefer  union  men  to  non-union. 

But  first,  and  above  all,  the  trade  unions  have  increased 
the  intelligence  of  the  laborers.  The  bare  fact  of  their 
meeting  together  and  discussing  the  questions  of  the  day, 
the  building  of  libraries,  the  listening  to  speeches,  and  the 
publication  of  newspapers  devoted  to  laboring  interests, — 
all  of  these  things  have  a  tendency  to  give  increased  in- 
telligence to  the  laborer.  But  it  may  be  added  that  where 
this  increased  intelligence  comes  there  is  an  elevated 
standard  of  life  which  commands  an  increase  of  wages. 
Of  course  this  education  and  the  elevation  of  the  standard 
of  life  is  also  influenced  by  a  limitation  of  numbers  in 
a  single  trade,  and  were  it  not  for  other  things  this  limita- 
tion in  one  trade  would  simply  overcrowd  other  trades. 
But  this  increased  intelligence  leads  to  the  prudential 
virtues,  and  a  tendency  to  limit  population  and  to  main- 
tain a  just  balance  between  the  laborers  themselves  and 
the  means  of  development. 

Yet  another  field  in  which  labor  organizations  have  done 
a  great  work  is  that  of  temperance,  for  nearly  all  labor 
organizations  are  in  themselves  temperance  societies,  and, 


ECONOMICS.  229 

indeed,  many  of  their  officers  are  total  abstainers.  Any- 
one acquainted  with  labor  unions  can  see  what  a  vast 
advantage  has  been  gained  in  this  respect.  They  have 
improved  the  quality  of  labor  by  means  of  temperance^ 
and  intelligence  and  skill  have  more  rapidly  developed. 

The  unions  have  also  greatly  improved  the  social  con- 
dition of  laborers.  Anyone  can  go  into  a  laborer's  home 
to-day  and  see  there  the  many  comforts  of  life.  There  are 
family  associations  of  an  elevated  nature  and  of  a  pure 
and  genuine  character.  One  will  be  forced  to  admit  that 
there  has  been  a  wonderful  improvement  in  the  common 
laborer  since  the  labor  organizations  sprang  up.  While 
not  all  of  his  progress  is  due  to  organization,  much  of  it 
would  have  been  lost  had  he  stood  alone  against  the  mo- 
mentum of  capital. 

Besides  the  foregoing,  the  labor  organizations  have  been 
compelled  to  cope  with  the  arbitrary  usage  of  the  employer, 
or  capitalistic  class,  and  have  done  something  to  gain  those 
rights  which  belong  to  them.  They  have  maintained  wages 
by  the  force  of  strikes,  if  not  always  in  a  direct  at  least  in 
an  indirect  way. 

Mistakes  of  Unionism. 

Yet  in  spite  of  these  many  good  qualities,  the  labor 
organizations  all  represent  many  weaknesses.  Their  aim 
may  be  industrial  peace,  but  they  are  all  prepared  for  war. 
The  strike  is  their  means  of  warfare;  and  it  is  greatly 
to  be  deplored  that  it  sometimes  seems  necessary,  just 
as  all  war  is  to  be  deplored,  though  sometimes  necessary. 
Strikes  as  a  rule  are  unfortunate  affairs,  and  in  nearly 
every  case,  unjust  affairs,  on  account  of  either  one  party  or 
the  other.     Yet  it  is  true  that  they  have  revealed  some- 


230  ECONOMICS. 

what  the  condition  of  labor  to  the  people  at  large,  and 
have  a  vast  educative  influence  on  the  employer,  the 
employee,  and  the  lookers-on.  It  is  to  be  deplored  that 
the  real  ultimate  power  of  the  labor  organization  rests 
upon  the  strike ;  and  yet  in  this  case  we  must  not  be  harsh 
with  them,  for,  indeed,  it  not  infrequently  happens  that 
though  they  appear  as  the  aggressors  in  certain  labor  move- 
ments, the  employers  themselves  have  been  the  real  cause 
of  bringing  them  on. 

It  must  also  be  said  against  them,  too,  that  they  have 
been  partial  monopolies,  with  the  intention  of  being  com- 
plete monopolies  as  soon  as  possible.  We  deplore  the  in- 
justice and  abuse  of  combined  capital,  especially  in  the 
form  of  trusts,  which  tend  to  limit  the  food-supply  of 
people  and  thus  to  cause  hunger  and  want  and  distress ;  or 
the  combination  of  coal  companies  in  the  time  of  winter, 
which  causes  poor  people  to  suffer  from  cold  in  their  rude 
apartments  and  leads  to  disease,  pauperism,  and  crime. 
At  the  same  time  we  must  consider  the  same  principle  on 
the  part  of  the  laborers  who  organize  strikes  unjustly  for 
the  purpose  of  making  a  shortage  in  labor,  and  thus  to 
depress  and  destroy  industries.  It  is  the  abuse  of  monopoly 
of  labor  as  the  abuse  of  monopoly  of  capital  that  is  the 
evil.  In  themselves  they  may  both  be  turned  to  good. 
Each  is  to  be  put  in  the  same  category  of  good  or  evil,  of 
justice  or  injustice.  And  right  here  it  may  be  stated, 
that,  failing  to  organize  all  laborers  into  a  class,  they  turn 
as  enemies  against  the  non-union  men,  or  "scabs,"  as  they 
are  called,  denying  them  the  privilege  to  earn  bread  to  keep 
their  families  from  starving,  and  thus  show  an  injustice 
and  short-sightedness  that  is  un-American  and  belongs  to 


ECOITOAIICS. 


231 


the  times  of  medieval  barbarism.  In  this  way  they  hope 
to  monopolize  labor  by  controlling  all  labor  within  a  given 
field  of  operation.  Their  object  is  not  an  increased  produc- 
tion, but  a  question  of  distribution,  or  of  directing  a 
larger  supply  of  distributed  goods  to  their  own  class. 

More  than  this,  in  seeking  the  exclusive  interest  of  class 
they  are  in  danger  of  losing  interest  in  the  reforms  which 
tend  to  benefit  common  humanity,  and  in  this  they  are 
short-sighted  and  conservative,  clinging  to  old  ideas  in- 
stead of  accepting  new  ones.  They  fight  the  introduction 
of  new  methods  that  tend  to  facilitate  the  production  of 
economic  goods  and  to  benefit  general  humanity.  In  other 
words,  in  attempting  to  gain  an  immediate  benefit,  they 
bring  about  an  ultimate  evil  to  society. 

There  are  minor  evils  of  trade  unions,  such  as  an  inter- 
ference with  the  apprentice  system.  They  have  discour- 
aged apprentices  to  a  large  extent,  and  limited  the  number 
that  may  be  taken  by  an  employer.  In  this  the  trade 
unions  have,  in  a  measure,  helped  to  break  down  the  old 
apprentice  system.  It  is  difiicult  for  a  man  who  desires 
to  learn  a  trade  to  have  any  opportunity,  unless  he  joins 
a  union  and  learns  under  its  direction.  To  a  large  extent 
this  is  to  be  deplored. 

There  are  minimum  rates  of  wages,  and  all  laborers 
must  come  within  the  boundaries  of  these  fixed  rates  as 
agreed  upon  by  union  men.  There  is  a  tendency  to  level 
down,  to  suppress  that  individual  effort  which  permits  a 
man  to  rise  above  his  fellows.  Without  intending  it  so, 
this  leveling  down  is  to  the  detriment  of  that  which  has 
been  a  means  of  the  elevation  of  the  English  race,  namely, 
individual  responsibility.     If  a  member  of  a  union  at  any 


232  ECONOMICS. 

time  does  a  little  too  mucli  work,  or  is  zealous  to  please 
his  employer,  they  call  him  a  bad  name  and  say  ''he  wants 
to  rise  above  us,"  and  then  they  turn  his  action  into  ridi- 
cule. This  has  a  tendency  to  suppress  honest,  individual 
effort  to  rise  above  all  surroundings,  and  without  so  desir- 
ing it  the  union  has  a  tendency  to  produce  a  dead  level  in 
society,  discouraging  progress.  While  the  general  result 
is  that  of  advancement  in  the  trade  unions,  in  this  respect 
it  is  non-progressive. 

The  right  to  strike  cannot  be  denied  labor  organiza- 
tions, any  more  than  the  right  to  organize,  except  it  be 
the  cause  of  a  great  injustice  to  a  large  number  of  indi- 
viduals of  a  community.  But  the  trade  unions  have 
greatly  abused  this  power  to  strike;  they  have  been  inju- 
dicious, sometimes  urged  on  by  scheming  leaders  who 
have  sought  for  prominence  in  the  union,  but  more  fre- 
quently urged  on  by  the  opinions  of  ignorant,  stupid  men, 
who  have  talked  over  their  grievances  until  they  have 
made  mountains  out  of  mole-hills.  I  may  say  in  this 
respect  about  injudicious  leaders,  that  there  is  as  much 
demagoguery  and  ambition  for  power  within  labor  or- 
ganizations, in  proportion  to  the  numbers,  as  in  any  po- 
litical party  in  the  United  States.  Human  nature  is  the 
same  here  as  elsewhere.  Whereas  the  right  to  organize 
may  be  claimed  by  any  body  of  people  in  our  free  coun- 
try, and  the  right  to  strike  for  higher  wages  may  also  be 
accorded  in  a  general  way,  nevertheless,  it  is  true  that 
this  same  position  may  be  taken  and  held  unjustly. 
Though  the  law  may  or  may  not  decide  in  this  way,  it 
is  the  common  opinion  that  no  small  body  of  men  has  a 
right  under  any  circumstances  to  discommode  the  whole 


ECONOMICS. 


233 


economic  world  from  the  Atlantic  to  the  Pacific  without 
being  arraigned  for  injustice,  by  the  common  opinion 
of  right-thinking  people. 

Result  of  Strikes. 

We  come  to  that  important  question,  the  results  of 
strikes.  Are  strikes  beneficial  or  detrimental  to  the  inter- 
ests of  laborers  ?  If  w^e  sum  up  the  immediate  gains 
in  most  strikes,  by  the  increase  in  wages,  and  on  the 
other  hand  take  the  losses  incurred  on  account  of  time 
and  expense  to  the  laborers,  it  can  be  claimed  that  the 
larger  majority  of  strikes  are  failures.  And  if  we  add  to 
this  the  inconvenience  caused  to  the  community,  the  dis- 
organization of  trade,  the  loss  to  capital,  it  may  be  said 
directly  that  strikes  fail.  But  if  we  consider  the  indirect 
influences,  keeping  up  a  common  sentiment  of  higher 
wages,  why,  then  possibly  the  victory  has  been  with  the 
labor  movement;  for  in  no  other  way  can  we  account  for 
the  great  general  improvement  in  the  labor  community 
and  the  increase  of  wages. 

It  will  be  seen  by  looking  over  a  list  of  the  strikes  that 
occurred  during  a  period  from  January  1,  1881,  to  June 
30th,  1894,  that  where  strikes  were  just  and  laborers  re- 
sponsible for  their  demands,  they  usually  succeeded.  But 
where  they  were  unjust  and  unreasonable,  and  where, 
despite  all  that  which  legitimately  fell  to  them,  they  tried 
to  manage  the  employer's  business,  we  may  say  they 
failed.  During  this  period  the  total  number  of  establish- 
ments striking  were  69,162.  Of  these,  21,680  were  for 
the  increase  of  wages;  10,543  for  reduction  of  hours; 
and  5,564  against  reduction  of  wages;    and  for  both  in- 


234 


ECONOMICS. 


crease  of  wages  and  reduction  of  hours,  4,Y8Y.  These  are 
the  four  chief  causes  of  strikes,  although  strikes  for  sym- 
pathy and  for  recognition  of  the  unions  are  increasing. 
Of  the  total  number  of  strikes,  44.49  per  cent,  are  re- 
ported as  successful;  11.25  per  cent,  as  partially  success- 
ful; and  44.23  per  cent,  as  failures.  During  this  period 
3,712,561  men  were  thrown  out  of  employment  on  ac- 
count of  strikes;  of  these,  2,061,259  were  on  account  of 
unsuccessful  strikes.  The  loss  in  wages  to  employees  was 
$163,807,657,  and  on  account  of  lockouts  for  the  same 
period,  $26,685,516,  or  a  total  loss  to  employees  of  the 
enormous  sum  of  $140,493,173.  The  loss  to  employers 
for  the  same  period  on  account  of  strikes  and  lockouts  was 
$44,825,237.  A  large  proportion  of  failures  have  been 
on  account  of  the  demands  for  change  of  time  for  begin- 
ning work,  discharge  of  employees  and  foremen,  discharge 
of  non-union  men,  against  the  employment  of  non-union 
men,  and  for  the  reduction  of  the  hours  of  labor,  and  so 
on;  while  the  large  proportion  of  successes  have  been  for 
an  increase  of  wages  and  a  reduction  of  hours. 

There  seems  to  be  a  tendency  for  labor  unions  to  be 
more  and  more  conservative  in  respect  to  striking.  They 
are  learning  by  degrees  what  they  may  accomplish  and 
what  they  may  not,  and  while  occasionally  we  see  a  dis- 
orderly strike  in  which  there  is  no  real  cause  or  occasion^ 
we  more  frequently  see  one  that  is  advocated  on  accounr 
of  some  special  grievance.  A  large  proportion  of  the 
officers  and  leaders  continually  counciling  infrequency  of 
strikes,  shows  that  there  is  a  tendency,  as  intelligence  in- 
creases, for  people  to  be  conservative.  They  recognize 
that  there  are  limits  to  what  they  may  do. 


ECONOMICS.  236 

Influence  of  Trade  Unions  on  Wages. 

In  discussing  the  laws  of  wages  there  are  fixed  what 
are  called  a  superior  and  an  inferior  limit.  The  inferior 
limit  represents  the  lowest  grade  of  wages,  below  which 
labor  cannot  perform  the  services  demanded ;  the  superior 
limit  represents  a  point  above  which,  if  wages  rise,  there 
will  be  no  employment,  and  a  large  number  of  laborers 
thrown  upon  the  market  will  tend  to  decrease  wages.  Of 
course  it  is  well  known  that  the  rate  of  wages  depends 
largely  upon  the  law  of  supply  and  demand,  but  trade 
unions  attempt  to  diminish  the  supply  of  regular  laborers. 
This  is  one  of  the  main  points  of  the  strike,  viz. :  to  walk 
out  and  leave  the  employer  without  help.  They  attempt 
to  fight  one  monopoly  by  creating  another.  Labor  is  not 
perfectly  mobile;  it  combines  in  groups,  one  group  with 
another  group,  and  cannot  be  sufficiently  detached  for  gen- 
eral competition.  The  result  is  that  the  unions  can  make 
a  shortage  in  any  given  industry,  and  thus  raise  wages  by 
destroying  the  equilibrium  of  supply  and  demand  in  anj 
given  occupation.  But  the  plentifulness  of  labor  in  all 
occupations  has  been  detrimental  to  their  highest  success 
in  this  respect.  They  also  fail  in  another  way.  If  the 
coal  miners  strike  for  higher  wages  and  thus  enhance  the 
price  of  coal,  members  of  other  unions  must  pay  a  higher 
price  for  coal,  greatly  to  their  detriment.  Again,  if  rail- 
road men  strike,  and  thus  hinder  the  delivery  of  raw  ma- 
terials or  machinery  that  would  employ  another  class, 
they  too  are  thrown  out  of  employment,  and  the  result 
is  that  one  part  of  the  laboring  community  w^orks  against 
the  interests  of  the  other  part.  Upon  this  principle  there 
is  a  general  desire  to  make  all  labor  one  solid  organiza- 


236 


ECONOMICS. 


tion.  But,  owing  to  diversity  of  interests,  which  must 
first  be  overcome,  this  is  a  difficult  matter.  However, 
wages  may  be  increased  by  the  general  operations  of  labor 
organizations. 

What  do  the  laborers  demand?  They  say,  "We  must 
have  a  larger  share  of  the  product  of  industry;"  that, 
"As  much  can  be  produced  in  one  hour  now  as  in  a  day 
formerly,  but  wages  are  not  increased.  We  get  little 
benefit  of  the  increased  facility  of  production."  This 
is  only  a  partial  truth.  The  rate  of  wages  is  increasing, 
but  not  in  proportion  to  the  increased  rapidity  of  produc- 
tion. Yet  there  is  a  limit  to  what  a  laborer  may  get. 
And  the  operations  of  trade  unions  cannot  force  wages 
above  a  certain  limit  determined  by  the  conditions  of 
industry  and  labor.    The  laws  of  wages  forbid  this. 

Effectiveness  of  Labor  Organization. 

Perhaps  the  economic  services  of  labor  organizations 
are  best  se^n  in  the  attempt  to  raise  the  standard  of  life 
and  to  create  a  temporary  monopoly,  at  least,  for  the 
supply  of  labor.  In  modern  times  they  have  sought  to 
induce  people  to  use  only  things  with  union  labels  upon 
them,  which  are  supposed  to  guarantee  that  they  are  made 
under  the  conditions  of  a  high  standard  of  life  and  well- 
paid  labor.  This  has  had  a  certain  influence  in  producing 
a  certain  grade  of  goods  and  in  preventing  the  use  of  sweat- 
made  garments.  In  this  respect  they  have  had  a  stronger 
influence  than  the  consumers'  league  or  any  other  agency 
for  the  purpose  of  encouraging  well-paid  labor. 

It  is  quite  interesting  to  notice  the  growing  power  and 
influence  of  labor  organizations.  In  England  they  are 
working  on  the  basis  of  productive  and  distributive  co- 


ECONOMICS. 


237 


operation  and  the  proper  protection  of  laborers.  Tlie 
strike  as  a  means  of  warfare  is  gradually  dying  out  in 
England,  although  occasionally  it  breaks  out  with  unpre- 
cedented fury,  largely  with  the  class  of  laborers  who  are 
less  skilled  and  have  not  yet  obtained  their  independence 
by  right  living.  In  America  the  strike  has  not  yet  been 
abandoned,  but  in  most  instances  it  occurs  among  the 
more  ignorant  laborers.  It  is  still,  however,  a  powerful 
weapon  in  the  settlement  of  the  grievances  of  laboring 
people.  Wherever  the  demands  of  laborers  have  been 
rational  they  have  in  most  instances  succeeded,  because 
they  have  had  the  support  of  the  press  and  to  a  large 
extent  that  of  the  people.  For  every  one  who  is  interested 
in  the  welfare  of  the  republic  wishes  to  see  a  well-paid, 
industrious,   intelligent,   prosperous   and  happy  body  of 

laborers. 

Arbitration  and  Conciliation. 

There  is  more  and  more  a  tendency  to  settle  all  labor 
difficulties  by  arbitration  and  conciliation.  In  the  first 
place,  they  attempt  to  bring  employer  and  employee  to- 
gether on  the  basis  of  agreement.  It  would  be  good  eco- 
nomics as  well  as  good  politics  if  there  were  a  Board  of 
Arbitration  in  every  State  of  the  Union,  which  would 
sit  first  as  a  Board  of  Conciliation,  trying  to  bring  em- 
ployer and  employee  together  upon  the  basis  of  agree- 
ment; and  second,  if  failing  in  this,  to  sit  as  a  Board  of 
Arbitration,  with  power  to  decide  that  if  laborers  do  con- 
tinue to  work  it  will  be  at  a  given  wage  within  a  limited 
time,  and  if  employers  go  on  with  their  business,  they 
shall  do  so  under  the  terms  dictated.  This  is  good  politics, 
because  two  gTOups  of  people  in  a  free  country  have  no 


238  ECONOMICS. 

right  to  enter  a  quarrel  which  disturbs  the  peace  and  de- 
stroys the  effect  of  the  other  men's  toil,  wasting  their 
wealth  and  destroying  business.  It  is  good  economics^ 
because  every  strike  entails  great  losses  both  to  employers 
and  laborers.  The  employer's  loss  would  be  the  margin 
on  goods,  the  laborer's  in  the  form  of  wages.  Under  these 
circumstances  a  Board  of  Arbitration  would  so  influence 
both  parties  that  they  would  adjust  themselves  to  the  con- 
ditions. Long-time  agreements  would  be  made,  and  rather 
than  pass  to  the  State  Board  of  Arbitration  they  would 
agree  to  settle  all  difficulties  by  a  private  Board  of  Arbi- 
tration made  up  of  laborers  and  employers. 

There  is  at  present  a  considerable  discussion  as  to  the 
relative  desirability  of  compulsory  and  voluntary  arbitra- 
tion. The  former  has  been  successfully  tried  in  New 
Zealand  and  the  latter  in  England.  Should  voluntary 
arbitration  become  sufficiently  universal,  it  is  better  than 
compulsory.  Yet  the  latter  should  be  insisted  upon  when- 
ever the  former  fails  to  do  its  proper  work ;  and  as  stated, 
even  in  compulsory  arbitration,  voluntary  agreements 
should  be  encouraged  and  compulsion  used  as  a  last 
resort.  Nevertheless,  arbitration  of  some  sort,  protect- 
ing the  rights  of  both  parties  in  the  strife,  is  the  most 
desirable  and  effective  solution  of  the  difficulty,  because 
it  is  the  normal  process  in  the  evolution  of  law  and  social 
order. 

References:  AVebb,  Sidney,  History  of  Trades-Unionism  ;  Ely, 
E.T.,  Labor  Movements  in  America;  McNeil,  The  Labor  Move- 
ment ;  Howell,  Conflict  of  Capital  and  Labor ;  Wright,  Carroll  D., 
Striken  and  Lockouts;  Commons,  J.  R.,  Trade  Unions  and  Labor 
Problems;  Pratt,  E.  A.,  Trade  Unionism  and  British  Industry. 


ECONOMICS.  239 


CHAPTEE  VIII. 

THE  DOCTRINE  OF  SOCIALISM  AND  THE  PRESENT 
ECONOMIC  SYSTEM. 

The  Claims  of  Socialism. 

The  socialists  find  fault  with  the  present  economic  sys- 
tem on  account  of  the  waste  of  competition  in  production 
and  the  injustice  of  distribution.  Recognizing,  as  every 
one  does,  the  imperfections  of  the  modern  system  of  eco- 
nomics, they  set  forth  in  contrast  an  ideal  system  in  which 
competition  is  destroyed  and  all  economic  society  is  ar- 
ranged in  groups,  either  the  state  or  smaller  than  the 
state,  which  have  complete  control  of  industry.  In  this 
way  they  hope  to  abolish  the  wage  system  and  all  the 
evils  attendant  upon  it,  money  and  the  difficulties  of 
circulation.  They  would  abolish  trusts,  for  the  state  would 
become  one  great  trust  which  would  order  the  amount 
and  kind  of  production,  establish  each  one's  share  of  the 
natural  product,  and  regulate  all  industrial,  social,  and 
educational  affairs.  They  hold  that  this  ideal  system 
might  be  established  at  once  if  the  people  would  but  re- 
solve to  enter  upon  it.  Believing  in  this  system,  they 
are  opposed  to  the  old  method  of  political  economy,  and 
will  listen  to  none  of  its  teachings  except  those  which  ad- 
v^ance  their  system. 

Socialism  has  helped  to  point  out  the  evils  of  modern 
economic  society,  and  to  that  extent  we  recognize  its  serv- 
ices; but  it  has  failed  in  providing  an  adequate  remedy 


240  ECONOMICS. 

for  the  evils  that  exist.  In  thus  pointing  out  the  evils  of 
society  and  railing  at  the  present  constitution  of  things, 
they  agree  with  the  anarchists;  but  in  their  remedies 
these  two  groups  of  agitators  disagree,  for  the  anarchist 
desires  no  government,  or  the  least  possible,  while  the 
socialist  desires  the  most  possible. 

In  order  to  explain  fully  the  meaning  of  this  ideal  sys- 
tem, a  brief  sketch  of  the  rise  and  progress  of  socialistic 
ideas  will  be  given. 

The  Adjustments  of  Social  Order. 

Since  man  began  to  think  at  all  about  social  life,  re- 
formers have  not  been  wanting  who  have  set  forth  ideal 
systems  of  social  order.  These  reformers,  earnestly  seek- 
ing the  improvement  of  human  society,  have  been  of 
widely  different  character.  There  have  been  merely  social 
writers,  who  have  set  forth  a  better  standard  of  excellence 
in  governmental  affairs;  there  have  been  pure  idealists^ 
with  impracticable  plans;  and  genuine  social  reformers, 
who  have  devised  and  executed  plans  for  the  improvement 
of  the  race.  The  Jew,  the  Greek,  the  Eoman,  and  the 
Teuton,  each  had  an  ideal  system  of  government,  and  each 
separate  nationality  has  had  its  ideal  philosophers  in  mat- 
ters of  social  order. 

Moses  was  a  reformer  of  the  better  class.  He  organized 
the  Hebrews  into  a  great  commonwealth  on  the  basis  of  jus- 
tice and  equal  rights.  He  talked  very  little  about  a  repub- 
lic :  he  went  to  work  and  made  one.  He  pointed  out  the 
duties  of  citizens  to  one  another,  and  taught  them  right 
principles  of  association  in  public  life.  In  fact,  he  took 
a  rude  and  barbarous  people,  just  out  of  the  bonds  of 


ECOITOMICS. 


241 


ilavery,  and  created  out  of  them  a  well-organized  nation 
n  which  the  rights  of  property  were  clearly  defined  and 
;he  protection  of  life  and  limb  fully  practiced.  The  sys- 
;em  of  government  set  forth  by  Moses  was  the  greatest  and 
nost  enlightened  of  all  the  systems  of  antiquity.  Such 
vas  its  force  and  influence  that  its  best  principles  have 
»me  down  to  us,  and  are  exhibited  in  the  rights  and  privi- 
eges  of  a  free  people. 

Greek  Ideal. 

In  Greece,  Lycurgus  and  Solon  codified  and  improved 
he  laws  of  their  countrymen,  and  Aristotle  wrote  a  book 
)n  civil  polity,  setting  forth  the  best  ideal  government  of 
lis  day.  He  was  a  practical  social  philosopher.  He  wrote 
m  various  forms  of  social  government  and  social  order, 
)ointing  out  that  which  was  best  and  that  which  was 
vorst  in  government.  The  politics  of  Aristotle  represents 
.o-day  the  most  profound  ideas  of  civil  polity  and  social 
)rder  ever  conceived  in  any  nation. 

But  it  remained  for  Plato  to  give  to  the  world  the  first 
deal  system  of  politics  based  upon  pure  theory.  In  the 
'ull  enthusiasm  of  youth,  beholding  the  defects  of  the 
jrecian  government,  he  wrote  a  book  called  the  "Repub- 
ic,''  in  which  he  pictured  man  as  living  in  a  state  of  social 
perfection, — a  state  entirely  different  from  that  which 
jxisted  in  Greece  in  Plato's  time.  While  Aristotle  had 
)ased  all  his  assumptions  on  the  actual,  the  real  and  the 
listorical,  Plato  in  his  ^'Eepublic"  failed  to  do  justice  to 
listorical  reality.  The  ^^  Republic "  is  a  book  grandly 
)riginal  in  conception  and  beautiful  in  execution,  but  it 
idvocated  principles  of  government  that  have  never  yet 
—16 


242  ECONOMICS. 

been  realized,  and  indeed  which  seem  impossible  to 
realize  until  society  has  vastly  changed  its  condition. 
Its  author  held  that  the  chief  end  of  man  was  to  perform 
his  duty  within  the  state;  he  was  to  be  absorbed  into  the 
state.  The  highest  good  of  man  was  sought  in  the  sup- 
pression of  the  individual  for  the  sake  of  social  order. 

While  Plato  understood  with  the  utmost  clearness  that 
the  character  of  any  state  must  depend  upon  the  character 
of  the  individuals  who  compose  it,  and  that  a  state  would 
be  no  better  than  the  citizens  of  which  it  is  composed^ 
yet  in  his  desire  to  carry  out  unity  and  symmetry  under  a 
particular  system  he  ignored  and  suppressed  the  indi- 
vidual man.  The  picture  which  he  presents  to  us  is  that 
of  an  ideal  aristocracy,  in  which  every  part  is  complete 
and  all  its  members  laboring  in  harmonious  contentment. 
There  were  some  extravagant  ideas  of  common  property^ 
common  life,  and  community  of  family  life;  yet  the 
prime  object  of  the  whole  was  to  insure  righteousness, 
justice,  and  morality.  Without  doubt  Plato  knew  that 
his  book  presented  an  ideal  plan,  and  that  he  never  ex- 
pected to  see  a  government  such  as  he  pictured  in  his 
"Eepublic''  prevail  in  Greece  until  the  character  of  Greek 
thought  and  Greek  life  had  greatly  changed  from  what 
it  actually  was  in  his  time. 

Plato  laid  the  foundation  of  modern  socialism.  Of  the 
long  line  of  idealists  who  have  pictured  to  us  what  a  per- 
fect government  ought  to  be,  Plato  stands  at  the  head. 
And  the  numberless  philosophic  dreamers  that  have  fol- 
lowed, owe  him  a  debt,  for  setting  forth  principles  of 
ideal  systems  of  government  beyond  which  none  of  them 
have  ever  traversed  very  far. 


ECONOMICS. 


243 


Boman  Practice. 

The  Komans  were  a  practical,  stoical  people,  who  dwelt 
not  in  visions  and  drqams  nor  ideal  systems  of  govern- 
ment. They  wrought  out  an  empire  through  the  strength 
of  law  and  by  force  of  arms.  It  was  not  until  the  church 
had  added  its  strength  and  its  life  to  the  declining  Eoman 
Empire  that  we  find  developed  theories  concerning  ideal 
governments.  It  was  in  the  fifth  century  that  St.  Au- 
gustine wrote  ''  The  City  of  God,"  in  which  he  compared 
the  state  and  the  declining  empire  of  Kome  with  the  ideal 
government  of  God.  His  ideal  government  was  repre- 
sented by  the  Church  of  Christ.  He  held  that  the  system 
of  God  which  sprang  up  and  grew  alongside  the  kingdoms 
of  the  earth  was  the  ideal  kingdom  of  this  life,  and  that  it 
would  gradually  draw  all  men  to  it  on  the  basis  of  fra- 
ternity, equality,  and  righteousness.  It  was  but  the 
prophecy  of  the  expansion  of  a  system  which  had  already 
been  created  and  whose  foundations  had  been  deeply  laid. 
For  centuries,  through  the  infiuence  of  these  ideas  set 
forth  by  St.  Augustine,  men  have  sought  to  find  an  ideal 
government  under  the  management  and  organization  of 
the  Christian  church.  In  this  they  were  doomed  to  dis- 
appointment; but  we  may  trace  the  origin  of  modern 
Christian  socialism  to  the  basis  of  this  commonwealth 
advocated  by  St.  Augustine. 

Thomas  More. 

Kext  to  Plato,  the  man  who  was  most  successful  in  rep- 
resenting an  ideal  system  which  had  a  great  influence  on 
the  thought  of  his  time  and  upon  all  Utopias  since,  was 
Sir  Thomas  More,  who  represented  man  as  living  in  a 
perfect  social  state.     Beholding  the  injustice  and  corrup- 


244  ECONOMICS. 

tion  of  the  government  of  England  which  had  grown  up 
under  arbitrary  power  of  kings  and  lords,  he  pictured  an 
island  government,  different  from  that  of  England,  in 
which  peace,  righteousness  and  absolute  justice  prevailed. 
This  ideal  nation  numbered  about  three  or  four  millions 
of  people,  living  a  simple  life  without  private  property. 
The  officers,  elected  by  the  people,  fixed  the  duration  of 
labor,  and  settled  what  the  labor  should  be.  This  disposed 
of  the  case  of  production.  The  question  of  the  distribu- 
tion of  goods  was  left  untouched,  because,  as  he  states, 
in  a  nation  where  wealth  was  abundant  and  justice  reigned 
no  one  would  desire  more  than  his  share  of  the  property. 
He  said  it  is  fear  of  want  that  makes  injustice,  and  if  this 
could  be  disposed  of,  then  justice  and  righteousness  would 
reign.  In  regard  to  the  social  life,  he  modified  the  insti- 
tution of  marriage  and  the  family  very  little.  He  held 
that  the  adoption  of  children  would  be  largely  practiced, 
in  order  to  keep  families  all  very  nearly  equal  in  size. 
If  excessive  increase  of  population  occurred,  it  was  to  be 
dealt  with  by  emigration.  In  this  respect  he  went  not  so 
far  as  Plato,  who  taught  that  the  state  ought  to  take  ex- 
clusive charge  of  the  rearing  of  children  upon  a  scientific 
basis,  producing  that  kind  which  was  most  desirable  in  the 
community.  This  presentation  of  the  ideal  government 
by  Sir  Thomas  More  in  his  "Utopia"  was  a  scathing 
criticism  upon  the  English  government  of  his  time.  It  is 
hardly  probable  that  More  had  any  idea  that  his  dream — 
this  picture  of  what  a  government  ought  to  be  under  a 
condition  of  perfect  justice  and  righteousness  in  humanity 
— would  ever  be  realized.  It  was  one  method  of  repre- 
senting the  blackness  and  corruption  of  a  wickedly  and 


ECONOMICS.  245 

weakly  governed  people.  But  it  stands  to-day  in  history 
as  the  representation  of  the  first  well-presented  system 
of  pure  communism.  It  is  only  a  step  or  two  from  the 
Utopia  of  Sir  Thomas  More  at  the  beginning  of  the  six- 
teenth century  to  the  development  of  French  socialism  in 
the  middle  of  the  eighteenth  century,  but  over  two  centu- 
ries of  time  rolled  away, — centuries  filled  with  changing 

events. 

Prevalence  of  Old  SystemB. 

In  spite  of  the  ideal  systems  of  government,  the  nations 
of  the  earth  continued  with  their  old  forms,  some  growing 
worse  and  others  better.  England  developed  a  more  en- 
lightened constitutional  government,  while  France  rushed 
headlong  into  imperialism.  France  soon  became  the  type 
of  imperial  government  in  which  the  king  claimed  to  be 
the  state  and  assumed  that  all  people  existed  for  his  sake. 
There  finally  arose  in  France  a  large  number  of  philoso- 
phers who,  dissatisfied  with  the  existing  order  of  things, 
quietly  pointed  out  the  defects  of  the  government  of  the 
monarchy  in  France.  But  the  kings  and  the  nobles  disre- 
garded the  faint  warnings  of  the  philosophers,  and  re- 
garded not  the  cry  of  distress  of  the  people.  The  worst 
features  of  ancient  despotism  had  been  revived.  It  gave 
neither  scope  nor  support  of  social  life;  it  guaranteed 
no  real  freedom.  The  great  mass  of  the  people  were 
regarded  as  serfs,  to  be  ruled  at  the  pleasure  of  the  aris- 
tocracy. The  old  forms  of  the  Church,  of  the  middle 
class  and  of  the  peasantry,  still  remained,  but  they  were 
without  representation  and  without  power.  The  edict  of 
kings,  set  forth  with  arbitrary  sw^ay,  controlled  the  liberty 
of  the  people.     The  people,  smarting  and  groaning  under 


246 


ECONOMICS. 


the  lash  of  the  Church  and  the  nobility,  had  learned  to 
hate  their  masters.  The  Church  had  absorbed  the  best 
property  of  the  commonwealth,  which  remained  untaxed. 
The  potentates  of  the  Church  and  the  nobles  circled 
around  the  king,  and  were  supported  by  the  grinding  toil 
of  the  common  people.  The  great  mass  of  artisans  were 
crowded  into  the  thickly  populated  and  dingy  shops, 
where  they  worked  incessantly  for  small  wages,  endured 
great  suffering  and  experienced  much  inconvenience. 
The  condition  of  the  peasantry  was  even  worse.  In  some 
parts  of  the  country  the  tillers  of  the  soil  were  a  race  of 
serfs,  ground  down  by  rack  rents,  feudal  oppression  and 
injustice,  and  subjected  to  all  forms  of  abuse,  being  re- 
duced frequently  to  the  very  verge  of  starvation.  Others, 
somewhat  more  comfortable,  were  subjected  to  vexatious 
laws,  administered  with  harshness  and  injustice  by  their 
superiors. 

Finally  there  came  a  time  when  the  accumulation  of 
evil  was  greater  than  the  nation  could  stand.  Short- 
sighted philosophers  and  agitators,  observing  the  condition 
of  affairs,  began  to  look  about  for  the  cause,  and  found 
it  in  the  imperfection  of  social  organization  of  the  gov- 
ernment. They  therefore  thought  if  the  government  was 
the  cause  of  the  evil,  the  only  way  to  reform  was  to  dispose 
of  the  government.  They  must  tear  down  the  present 
structure  and  build  anew  from  the  foundation.  The  spirit 
of  their  philosophy  was  caught  by  the  infuriated  mob,  and 
the  French  Revolution  came  with  all  its  terrors  and  bloody 
deeds.  It  was  in  this  period  that  socialism  again  ap- 
peared as  the  solution  of  the  problem  of  social  order. 


ECONOMICS. 


247 


Modern  Communism. 

Its  first  chief  advocate  was  the  communist,  Babeuf. 
He  had  been  preceded  by  Moreillet,  who  in  his  code  of 
nature  taught  that  man  by  nature  possessed  every  virtue 
and  was  only  depraved  by  the  influence  of  bad  institutions, 
and  that  the  worst  of  these  bad  institutions  was  that  of 
private  property.  He  held  that  the  degradation  of  pov- 
erty, on  the  one  side,  and  the  enervation  of  riches,  on  the 
other,  were  two  causes  which  kept  men  from  being  indus- 
trious. And  he  held  that  every  person  should  contribute 
to  the  state  according  to  his  strength  and  wealth,  and  that 
in  turn  the  state  should  support  him.  Mably  followed 
this  writer,  and  held  that  the  establishment  of  property  in 
land  had  been  the  great  source  of  avarice,  of  ambition,  and 
of  vanity. 

While  the  French  Revolution  had  for  its  war-cry, 
"Equality  and  fraternity,"  Babeuf  and  his  followers  held 
that  the  only  way  to  establish  this  equality  and  fraternity 
was  to  abolish  private  property  and  pass  into  a  state  of 
pure  communism.  Hence  in  1796  Babeuf  organized  his 
band  of  "equals,"  who  wished  to  overthrow  the  state  gov- 
ernment and  reestablish  it  on  a  purely  communistic  basis. 
His  theory/  concerning  government  was  that  the  aim  of 
society  was  the  happiness  of  all,  and  that  happiness  con- 
sisted in  equality,  and  that  there  was  no  way  in  which 
happiness  could  exist  unless  perfect  and  absolute  equality 
reigned.  He  held  that  inharmony  would  prevail  if  a 
single  individual  in  the  world  was  richer  or  more  power- 
ful than  his  fellows.  And  Babeuf  and  his  followers  were. 
ready  to  make  any  sacrifice  whatever  for  the  sake  of  this 
equality.     They  said:   Let  all  the  arts  perish,  if  need  be^ 


248  EcoisroMics. 

provided  we  retain  real  equality.  They  lield  that  nature 
had  given  to  every  man  an  equal  right  to  the  enjoyment 
of  all  goods;  yet  they  proposed  to  obtain  this  equality 
by  coercion.  A  large  national  property  might  be  obtained 
by  seizing  the  property  of  corporations  and  public  institu- 
tions, and  this  could  be  added  to  by  gifts  and  by  continued 
absorption  until  the  government  should  own  all  the  prop- 
erty and  all  the  means  of  production.  The  people  were  to 
be  divided  into  different  groups  of  laborers,  and  each  as- 
signed to  his  particular  group.  All  social  conditions,  save 
those  relating  to  sex  and  age,  were  to  be  abolished.  Equal- 
ity having  been  gained  universally,  all  must  be  dressed 
alike,  all  must  eat  the  same  quantity  of  the  same  kinds  of 
foods;  and  all  must  be  educated  alike,  and  all  education 
must  be  restricted  to  the  elementary  branches,  that  inequal- 
ity might  not  continue  to  exist.  Even  the  children  were  to 
be  removed  from  the  family  at  an  early  age  and  brought 
up  together,  in  order  that  they  might  be  trained  in  the 
principles  of  communism  and  educated  on  the  basis  of 
equality.  The  whole  scheme  seems  dreary  and  monotonous 
enough.  Everything  was  contrived  to  level  the  people 
down  and  not  to  elevate  them,  to  bring  the  highest  down 
to  the  plane  of  the  stupid  and  self -contented  of  a  lower 
order. 

Etienne  Cabet. 

From  this  dismal  picture  let  us  turn  to  fitienne  Cabet, 
the  son  of  a  cooper,  born  in  Dijon,  France,  1788.  A  well- 
educated  man,  he  practiced  law  for  a  while  in  his  native 
city  and  subsequently  in  Paris,  and  finally  became 
attorney-general  for  Corsica  in  1830 ;  but  he  lost  his  place 
in  the  following  year,  on  account  of  his  fierce  opposition 


ECONOMICS. 

to  the  government.  The  remainder  of  his  life  was  devoted 
to  politics,  literature,  and  communism.  He  wrote  a  popu- 
lar history  of  the  French  Eevolution,  and  published  a  jour- 
nal in  which  he  advocated  moderate  communistic  prin- 
ciples. For  some  of  his  utterances  he  was  condemned  to 
two  years'  imprisonment.  But  escaping,  he  fled  to  Lon- 
don, where  he  became  acquainted  with  Sir  Thomas  More's 
Utopia,  which  made  a  deep  impression  on  his  mind.  He 
returned  to  France  in  1836  and  published  his  book,  en- 
titled "A  Voyage  to  Icaria."  In  this  he  describes  a  coun- 
try previously  unknown,  quite  as  large  as  France  or 
England,  but  more  populous  and  a  thousand  times  more 
blessed.  "  Here  crimes  are  unknown ;  it  is  a  second  prom- 
ised land,  an  Eden,  an  elysium,  a  new  terrestrial  paradise.'' 
The  whole  book  was  a  philosophical  social  romance,  a 
dream  of  dreams.  Cabet,  who  had  many  followers  in 
France,  was  challenged  to  put  his  theories  to  the  test,  in 
answer  to  which  he  organized  a  colony  for  settlement  in 
Texas.  Failing  to  make  a  lodgment  in  this  wilderness,  the 
company  passed  up  the  Mississippi  and  settled  at  ^N'auvoo^ 
in  Illinois,  a  place  which  had  recently  been  vacated  by  the 
Mormons.  Subsequently  he  passed  into  Iowa,  and  founded 
the  town  of  Icaria.  Cabet  returned  to  St.  Louis,  where  he 
died  in  1856.  But  the  town  of  Icaria  continues  to  exist  to 
the  present  time,  although  but  a  year  ago  it  passed  into 
the  hands  of  a  receiver  for  the  sale  and  distribution  of  the 
property.  Thus  ends  one  of  the  most  romantic  and  inter- 
esting attempts  at  communism  known  to  history.  The 
people  of  Icaria  dwelt  and  toiled  together  many  years, 
sowing  seeds  and  harvesting  crops  which  they  put  into  a 
common  granary.    The  men  all  dressed  alike  in  blue  duck 


260 


ECONOMICS. 


suits;  thev  went  to  market  in  blue  wagons  drawn  by  ox 
teams.  They  lived  a  rude,  homely,  peaceful  life ;  but  the 
rising  generation,  stirred  by  thoughts  of  modern  life,  by 
a  desire  for  progress  and  change,  could  no  longer  be  held 
slaves  to  an  ideal  system.  For  how  different  was  this  rude 
picture  of  this  slow-going  community  from  the  dream  that 
had  been  presented!  It  may  be  a  noble  thing  for  men 
and  women  to  withdraw  from  the  sharp  competition  of 
individual  interests  and  combine  themselves  in  an  organ- 
ization based  on  equality  and  brotherly  love ;  it  is  a  beau- 
tiful picture  to  see  in  our  visions  and  dreams  a  group  of 
people  living  in  ease  and  elegance,  happiness,  peace,  and 
perfect  harmony :  but  how  different  from  the  cold,  dreary, 
prosaic,  monotonous  life  of  the  actual  reality!  And  this 
contrast,  together  with  the  desire  to  be  men  and  women, 
on  the  part  of  the  younger  members  of  the  community, 
to  mingle  freely  with  others  in  the  pursuit  of  happiness, 
pleasure,  and  wealth,  was  sufficient  to  cause  the  system  to 
break  down  by  its  own  weight. 

Cabet  advocated  a  general  transition  to  communism. 
He  thought  it  would  take  fifty  years  for  such  a  transition. 
The  principle  of  the  organization  was  simple  enough. 
Cabet  says :  "  If  we  are  asked,  what  is  our  science,  we 
reply  fraternity;  our  theory,  fraternity;  our  system,  fra- 
ternity.'' Cabet  was  the  first  and  greatest  pure  communist 
of  France,  and  Icaria  the  most  ideal  community  ever  in 

practice. 

Modern  Socialism. 

Saint-Simon  was  a  socialist.  He  held  that  individuals 
should  organize  themselves  into  natural  associations  for 
the  purpose  of  carrying  on  production  and  distribution. 


ECONOMICS.  251 

The  communist  believes  in  equality;  the  socialist  in  dis- 
tributive justice.  Saint-Simon  held  that  men  were  nat- 
urally unequal,  and  that  this  inequality  was  the  very  basis 
of  association  and  an  indispensable  condition  of  social 
order.  He  and  his  followers,  then,  rejected  the  system 
of  community  of  goods,  for  this  would  be  a  manifest  viola- 
tion of  the  doctrine  which  they  taught,  namely,  that  the 
purpose  of  all  social  institutions  should  be  the  moral  and 
physical  amelioration  of  the  most  numerous  class;  that 
all  privileges  of  birth,  without  exception,  should  be  abol- 
ished, and  that  rewards  should  go  to  each  according  to 
his  capacity,  and  each  capacity  estimated  according  to  its 
works.  The  followers  of  Saint-Simon  were  diligent  in 
their  efforts  to  improve  the  lot  of  the  people  and  to  relieve 
the  distressed,  but  except  in  theory  they  ended  in  failure. 

Fourier. 

Fourier  held  doctrines  similar  to  that  of  Saint-Simon. 
The  principles  advocated  by  the  followers  of  Fourier  were 
lofty,  noble,  and  generous  in  the  extreme.  They  held  as 
the  essential  duty  of  society  and  of  every  individual  to 
regulate  their  conduct  so  as  to  produce  the  greatest  possible 
benefit  of  humanity,  and  to  make  this  the  consistent  object 
of  all  their  thoughts,  words,  and  actions.  The  perception 
of  this  duty  was  dictated  to  the  sages  of  all  times  in  the 
following  precepts:  To  love  truth  as  one's  self; — To  act 
toward  others  as  you  would  wish  them  to  act  toward  you ; 
— To  give  a  common  support  to  one  another; — The  per- 
petual and  gratuitous  assistance  from  nature  proves  that 
man,  by  the  very  fact  of  his  birth,  carries  and  never 
should  lose  certain  natural  rights  in  the  wealth  that  is 
produced.    Hence  it  follows  that  the  weak  have  a  right  to 


252  ECONOMICS. 

enjoy  what  the  processes  of  nature  and  the  public  prosper- 
ity place  at  the  disposal  of  man,  and  that  it  is  the  duty  of 
the  strong  to  leave  to  the  weak  a  just  share  of  the  general 
product. 

The  influence  of  Fourierism  was  very  great  in  America. 
Many  prominent  people,  taking  up  the  beautiful  doctrine 
advanced,  tried  to  put  it  into  practice  on  American  soil. 
Among  those  who  encouraged  it  were:  Horace  Greeley, 
Charles  A.  Dana,  Albert  Brisbane,  George  Kipley,  Dr. 
Channing,  and  Margaret  Fuller.  Altogether,  thirty-four 
experiments  of  Fourierism  were  made  in  America,  all  of 
which  failed  or  are  to-day  in  a  rapidly  declining  condition. 

State  Socialism. 
I  must  refer  to  one  or  two  other  French  socialists. 
Louis  Blanc  was  the  first  to  join  social  and  economic 
reform  to  politics ;  he  was  the  first  state  socialist.  Saint- 
Simon  and  Fourier  were  merely  economic  and  social 
reformers.  They  were  not  politicians  or  political  organ- 
izers; they  appealed  simply  to  brotherly  love  and  to  jus- 
tice, and  sought  to  overthrow  self-interest.  Louis  Blanc 
assumed,  as  his  prime  principle,  the  right  of  every  man  to 
labor,  and  he  therefore  held  that  the  government  should 
build  workshops  for  the  employment  of  the  unemployed. 
Though  of  great  influence  at  the  time,  his  career  was 
short-lived.  But  it  is  strange  to  note  how  he  impressed 
upon  so  many  followers  in  so  short  a  time  the  great  im- 
portance and  righteousness  of  his  scheme.  He  found  the 
aim  of  life  to  be  happiness  and  development;  happiness 
and  development  combined,  he  taught,  can  only  be  ob- 
tained v/hen  the  state  takes  hold  and  regulates  social  in- 
dustry.   He  says  that  fraternity  means  we  are  all  common 


ECONOMICS. 


253 


brothers  of  one  great  family,  and  that  it  is  ordained  hj 
God  himself  that  man  should  produce  according  to  his 
wants.  This  was  his  formula  of  perfection  and  justice, 
and  to  this  end  he  thought  the  state  ought  to  acquire  public 
property  by  degrees,  and  after  a  long  time  it  would  grow 
into  a  state  of  perfect  socialism.  The  whole  plan  rested 
upon  distributive  justice.  It  is  true  that  there  are  places 
in  the  world  that  need  large  natures  and  fine  intellect; 
there  are  likewise  humble  positions  which  must  be  filled. 
It  was  a  happy  ideal  that  all  people  could  labor  together 
as  one  great  family  in  the  higher  and  lower  degrees,  and 
each  one  receive  compensation  according  to  the  service 
performed  and  have  his  wants  supplied  according  to  the 
station  which  he  filled.  It  was  one  more  golden  dream 
to  be  added  to  the  category  of  the  many  which  had  philoso- 
phized about  a  paradise  on  earth. 

Anarchigm. 
Proudhon  followed  Louis  Blanc.  He  hated  the  rich^ 
but  he  felt  for  the  poor,  and  desired  to  bring  about  a  social 
state  which  would  be  of  great  assistance  to  them.  He 
desired  to  level  all  organizing  power  and  to  develop  per- 
fect individuality.  His  theory  was  contradictory,  for  the 
supposition  assumes  that  perfect  collectivism  and  perfect 
individualism  can  exist  at  the  same  time.  He  startled 
the  world  by  asking,  ^'What  is  property?"  and  gave  the 
more  startling  reply,  "Property  is  theft,  and  property- 
holders  thieves."  Proudhon  was  an  anarchist.  What  was 
the  ideal  government  in  his  eyes  ?  No  government.  He 
desired  absolute  liberty.  He  rejected  communism,  but  ad- 
hered to  the  prime  principles  of  socialism,  and  held  that 
property  was  the  suicide  of  society.     He  was  an  earnest, 


254  ECONOMICS. 

sincere  man;  he  loved  the  people,  and  sought  to  improve 
their  condition.  He  said:  "O  God  of  liberty,  may  my 
memory  perish  if  humanity  may  but  be  free !  If  I  may 
but  see,  in  my  obscurity,  the  people  finally  instructed,  if 
noble  instructors  but  enlighten  them,  if  disinterested 
hearts  but  guide  them!''  This  ideal  anarchist  philoso- 
phized a  government  out  of  existence;  the  practical  an- 
archist seeks  to  destroy  by  force.  The  one  has  a  beautiful 
theory,  the  other  proposes  a  horrible  actuality. 

German  Socialism. 
Brief  mention  must  be  made  of  the  German  socialists 
represented  by  strong  natures  like  Ferdinand  Lassalle, 
Rodbertus,  and  Karl  Marx,  who  have  mingled  the  doc- 
trines of  economic  life  with  politics  and  developed  the 
social  democracy  of  Germany.  They  have  been,  as  a  rule, 
closer  students  of  human  society  and  economic  principles 
than  the  French;  they  have  been  more  systematic,  more 
analytic,  but  not  less  earnest  in  the  advance  of  their 
theories.  They  have  laid  great  stress  on  the  fact  that 
labor  is  the  source  of  all  wealth,  and  that  the  proportion 
of  goods  falling  to  the  laborer  as  production  advances  is 
continually  decreasing.  I  have  not  space  to  mention  the 
modern  German  socialists,  one  branch  of  which  is  led  by 
Bebel  and  the  other  by  Liebknecht,  and  the  growth  of 
social  democracy  in  Germany.  Worthy  of  mention  are 
the  influence  of  Robert  Owen  in  England  in  the  early 
part  of  this  century  in  developing  communistic  coopera- 
tion, the  later  societies  in  England  for  the  advancement 
of  pure  socialism,  and  the  recent  growth  of  the  socialistic 
labor  party.  There  should  be  recorded  also  the  history  of 
the  progress  of  these  ideas  in  America,  and  the  attempts  that 


ECONOMICS. 


255 


have  been  made  to  establish  communism,  socialism,  and 
anarchy  in  our  own  country.  The  works  of  such  men  as 
Bellamy,  the  great  advocate  of  state  socialism,  of  Henry 
George,  the  advocate  of  nationalism  in  land,  and  of  the 
Christian  socialists  that  have  sprung  up  in  recent  days, 
are  all  worthy  of  mention. 

Socialism  in  America. 

'No  one  can  ignore  the  rapid  growth  of  socialism  inAmer- 
ica,  nor  minimize  the  social  tendency  of  this  age.  Such 
classes  of  persons,  who  not  only  insist  on  the  government 
of  monopolies  but  also  believe  that  the  government  should 
own  all  productive  processes,  are  constantly  increasing. 
They  hold  that  the  railroads  and  the  telegraphs,  canals 
and  water-ways,  gas-works  and  electric  lights,  farms,  tim- 
ber lands,  mines,  mills,  factories,  and  stores, — in  fact,  all 
industrial  enterprises, — should  be  under  the  immediate 
control  of  the  government.  This  is  pure  socialism,  and 
carried  to  its  extreme  limit  abolishes  the  wage  system  and 
establishes  an  equitable  method  of  distribution.  Others 
go  so  far  as  to  advocate  that  all  competition  should  be 
abolished,  and  that  subsistence  and  support  be  guaranteed 
without  protest  to  every  individual. 

This  is  the  ultimate  conclusion  of  pure  socialism.  The 
ranks  of  this  army  of  idealists  are  recruited  by  people  of 
widely  different  characters  and  conditions  of  life.  There 
are  those  whose  motives  for  a  better  life  for  all  humanity 
are  not  to  be  impugned,  any  more  than  the  motives  of 
those  who  think  that  free  competition,  which  gives  a  free 
and  full  play  of  humanity,  will  yield  the  highest  and  best 
return  of  human  profit  and  happiness.  They  realize  more 
clearly  to-day  than  ever  before  the  imperfections  of  human 


256  ECONOMICS. 

government,  and  present  with  greater  earnestness  the 
ideals  of  perfect  society.  The  idealists  are  impressed 
more  forcibly  than  ever  before  that  a  perfect  society  could 
be  realized  if  the  people  only  willed  it.  They  are  seeking 
the  highest  good  of  the  greatest  number,  and  are  ready  to 
sacrifice  health  and  fortune  for  the  advancement  of  these 
ends.  Deceived  they  may  be  by  the  socialistic  mirage, 
yet  their  earnestness  and  sincerity  cannot  be  successfully 
denied. 

There  are  also  found  within  this  group  of  recruits  to  the 
army  of  socialism,  people  who  represent  the  basest  and 
most  irritating  forms  of  human  selfishness.  They  desire 
state  ownership  of  industries  that  they  may  receive  more 
from  the  community  than  ihey  are  entitled  to  receive. 
They  desire  a  new  regime  that  they  may  be  in  a  position 
to  profit  from  the  toil  of  others.  It  is  the  same  sort  of 
selfishness  which  prompts  the  individual  to  seek  piratical 
freedom  which  will  enable  him  to  possess  all  that  he  can 
of  this  world's  goods,  by  fair  means  or  foul,  regardless 
of  the  sufferings  of  others.  The  very  selfishness  of  their 
own  hearts  makes  them  cry  out  against  the  selfishness  of 
others. 

The  ranks  of  the  socialistic  army  are  also  daily  recruited 
by  people  who  started  out  fearlessly  and  honestly  for  a  re- 
spectable position  in  social  life,  and  having  been  defeated 
in  their  combat,  are  discouraged  and  despondent.  When 
they  find  many  others  in  the  same  condition  as  themselves, 
they  believe  that  there  is  something  radically  wrong  in  the 
nature  of  affairs  when  patience  and  honest  endeavor  fail 
to  reap  their  just  reward.  They  observe  that  part  of  the 
people  are  happy  and  prosperous,  and  a  part,  like  them- 


ECONOMICS.  257 

selves,  miserable  and  poverty-stricken.     Victims  of  the 

teachings   of  the   demagogues   of  the   selfish   class,   they 

hastily  conclude  that  this  difference  of  condition  is  due 

to  the  unjust  principles  of  social  organization,  and  they 

turn  instinctively  to  the  state  for  the  redress  of  grievances, 

believing  that  it  has  the  power  to  equalize  conditions  of 

life. 

Inadequacy  of  Socialism. 

We  observe,  then,  that  there  is  nothing  particularly 
new  in  this  modern  doctrine  of  socialism ;  it  has  historical 
foundations.  The  socialism  of  to-day  is  founded  upon  the 
accumulated  error  of  past  philosophy  and  present  practice. 
Before  closing  this  chapter,  let  us  leave  for  a  short  time 
the  historical  current  of  its  onward  sweep,  and  ask  briefly^ 
What  are  the  defects  of  its  philosophy,  and  what  are  the 
remedies  for  the  evils  which  it  points  out  ?  Granting  that 
many  of  the  evils  which  these  idealists  have  pointed  out 
to  us  are  real;  granting  that  their  beautiful  theories  and 
their  optimistic  plans  have  given  us  at  times  enthusiasm 
and  warmed  our  hearts;  acknowledging  that  they  have 
had  some  influence  over  the  philosophy  of  modern  gov- 
ernment and  are  having  it  to-day; — ^what  are  the  defects 
of  their  system  ? 

In  the  first  place,  the  evils  which  the  socialists  have 
pointed  out  have  been  greatly  exaggerated,  and  the  times 
have  been  pictured  to  be  much  worse  than  they  really  are. 
Our  industrial  system  under  present  conditions  is  not  an 
unmixed  evil.  The  changes  which  it  has  wrought  through 
invention  and  discovery,  by  working  immediate  injury  to 
some  will  work  final  benefit  to  all.  The  rapid  movement 
of  productive  enterprise  leads  to  much  irregularity  in  the 
-17 


258 


ECONOMICS. 


business  world  and  gives  rise  to  much  distress, — neverthe- 
less, society  is  in  a  much  better  condition  to-day  than  ever 
before;  and  if  we  consider  the  evolutionary  process  by 
which  society  develops,  we  shall  find  that  justice  and 
equality  are  more  nearly  approximated  to-day  than  ever 
before.  The  search-light  of  modern  investigation,  coupled 
with  the  diffusion  of  learning,  has  enabled  us  to  see  things 
more  clearly  as  they  are.  Consequently,  we  behold  more 
clearly  the  nature  of  the  evils  which  society  has  to  combat. 
If  we  are  faithful  in  searching  out  the  evil  things  which 
society  has  to  combat,  let  us  be  faithful  also  in  searching 
out  and  magnifying  the  excellences  of  modern  economic 
and  social  life,  and  we  shall  see  the  advantages  of  our 
modern  system. 

Again,  even  if  the  evils  which  the  socialists  portray  were 
greater  than  they  have  been  represented,  there  is  no  assur- 
ance that  extreme  socialism  would  remedy  the  defects  of 
rank  individualism.  Socialists  have  been  guilty  of  taking 
a  partial  diagnosis  of  the  case,  and  consequently  have  pro- 
posed inadequate  remedies.  In  their  zeal  to  reach  an 
economic  millennium  on  earth  they  have  read  history  care- 
lessly and  superficially  and  have  interpreted  it  falsely. 
They  have  selected  from  a  few  economists  those  systems 
which  best  suited  their  system,  and  with  insufficient  data 
have  reasoned  illogically.  They  have  juggled  with  half- 
knowledge,  from  which  they  have  attempted  to  deduce 
general  principles.  Granting  that  the  healthy  and  volun- 
tary cooperation  of  industrial  classes  is  essential  to  all 
good  economic  progress,  and  granting,  too,  that  there  is  a 
continued  tendency  to  monopolistic  power  in  production 
as  well  as  in  distribution,  they  have  failed  to  prove  that 


it  is  necessary  for  the  government  to  own  and  manage  all 
resources  of  industry  in  order  to  secure  to  the  people  the 
benefits  of  this  monopoly  arising  out  of  excessive  free 
competition.  They  have  furnished  no  guaranty  what- 
soever, or  even  a  strong  probability,  that  socialism  could 
regulate  the  disorders  of  economic  life. 

Perhaps  one  of  the  weakest  points  in  the  system  offered 
by  the  socialists  arises  from  the  fact  that  they  offer  no 
definite  plan  for  the  rapid  transition  from  individualism 
to  socialism.  They  simply  state  it  will  be  so,  and  expect 
people  to  accept  the  system.  One  of  the  most  prominent 
socialists  of  the  United  States  in  making  an  address  a  short 
time  since  drew  a  fanciful  picture  showing  how  socialism 
would  be  accomplished  within  ten  years,  and  how  by  that 
time  all  parties  would  be  leaving  the  system  of  competition 
and  rushing  forward  to  adopt  state  socialism.  He  held 
that  the  time  was  at  hand  when  the  capitalist  and  monopo- 
list would  gladly  free  themselves  from  the  present  ruinous 
practice  of  free  competition,  and  elect  socialism.  The  plan 
of  the  transition,  however,  was  left  out,  and  the  possible 
results  of  failure  were  never  for  a  single  instant  consid- 
ered. He  began  his  peroration  with  the  following  words : 
^^  There  is  a  dream  hovering  in  the  air,"  which  seemed  to 
be  a  fit  climax  to  an  illogical  and  ineffective  argument. 
The  whole  plan  is  a  dream,  which  if  ever  realized  will 
be  to  the  generations  yet  unborn. 

But  people  may  inquire:  If  it  is  so  illogical,  what 
harm  can  it  be  to  have  this  dream  ?  Why  not  keep  before 
the  people  a  perfect  ideal  government?  The  harm  is  to 
the  toiling  wayfarer  on  the  dusty  plains  who  sees  in  the 
distance  the  mirage,  and  travels  on  with  hope  of  presently 


260 


ECONOMICS. 


being  in  the  shady  groves  by  cool  waters  where  rest  can 
be  obtained  and  thirst  quenched.  He  comes  to  the  spot 
but  to  see  it  recede  in  the  distance,  or  the  whole  vision 
to  dissolve.  The  man  who  is  toiling  to  build  a  home  for  his 
family,  and  beholds  year  after  year  the  failure  of  all  his 
plans,  sickened  with  deferred  hope,  is  taught  that  the  cause 
of  this  condition  is  imperfect  government  or  imperfect  in- 
dustrial system,  turns  readily  to  a  plan  which  will  relieve 
his  present  exigencies  and  yield  him  what  he  terms  a  just 
and  fair  return  for  his  labor.  As  a  result  of  this  belief  he 
becomes  more  and  more  discontented  with  his  lot,  and  the 
social  world  of  toil  becomes  more  distasteful  to  him  as  he 
persuades  himself  that  injustice  is  being  done  him  by 
the  government.  Failing  to  realize  his  hopes  for  imme- 
diate relief  by  means  of  socialism,  he  enters  the  field  of 
expectancy,  then  of  pauperism  and  vagrancy.  Thousands 
go  down  to  join  the  ranks  of  paupers  and  vagrants  every 
year  on  account  of  false  hopes  held  out  to  them  by  the 
theories  of  socialism.  The  evil  effects  of  teaching  a  per- 
nicious doctrine  are  great. 

Again,  socialism  fails  to  account  for  the  present  condi- 
tion of  human  nature  as  revealed  by  past  history  and  pres- 
ent conditions.  It  has  made  no  allowance  for  the  contin- 
uance of  the  selfish  greed  of  humanity.  Socialism  once 
established,  will  there  not  be  an  endless  struggle  for  place 
and  preferment,  a  struggle  for  supremacy,  ending  in  ex- 
cessive dominance  of  man  over  his  fellows  ?  And  will  there 
not  be  a  much  larger  opportunity  for  this  dominance  and 
selfish  aggrandizement  than  there  is  now?  Have  we  any 
guaranty  that  human  nature  will  be  changed  in  the  twink- 
ling of  an  eye  from  hard,  selfish,  grasping  impulse  to  that 


ECONOMICS.  261 

of  noble,  brave,  and  generous  disposition  which  impels 
the  individual  to  share  all  good  with  his  fellows?  Such 
an  assumption  is  a  vain  delusion,  a  dream,  and  could  only 
bring  about  political  and  social  revolution  combined,  which 
would  end  in  the  spilling  of  blood  in  the  struggle  for  daily 
bread,  a  revolution  such  as  the  world  has  never  yet  seen. 
The  assumption  that,  because  free  competition  in  the 
industrial  world  has  led  to  increased  selfishness  and  arbi- 
trary dominance  of  certain  ones  who  accumulate  great 
wealth  from  others,  and  that  if  we  could  change  the  man- 
agement of  all  industries  to  the  political  power,  namely, 
the  state,  we  should  be  relieved  from  these  evils,  is  entirely 
false;  for  it  assumes  that  selfishness  does  not  exist  in 
political  circles  and  is  not  manifested  in  the  political  affairs 
of  the  state.  Every  one  knows  that  selfishness  is  more 
evident  to-day  in  the  common  political  life  than  in  the  in- 
dustrial, and  that  selfishness  occurs  not  only  on  the  part  of 
those  already  in  power,  but  is  just  as  prominent  in  those 
outside  of  power,  who  are  waiting  for  an  opportunity  to 
elevate  themselves  regardless  of  justice  to  others.  The 
political  conditions  of  the  day  are  indeed  far  worse  than 
the  economic  conditions,  for  tho  former  consist  in  the  re- 
placement of  one  spoils  system  for  another,  while  in  the 
economic  world  we  do  see  some  potent  signs  of  the  pro- 
gressive regulation  of  principles  of  justice  and  equality 
in  the  production  and  distribution  of  goods.  To  place 
everything  under  a  political  hierarchy  means  the  concen- 
tration of  selfishness  and  the  removal  of  the  last  cheeky 
called  competition,  from  the  field  of  operation.  To  illus- 
trate this  fact,  we  need  only  to  point  to  the  dangers  of  con-- 
centrated  selfishness  in  the  political  management  of  our 


262  ECONOMICS. 

large  cities  during  the  past  forty  years.  Here  we  see  the 
enlarged  power  of  human  government  in  the  hands  of  indi- 
viduals struggling  selfishly  for  the  largest  possible  indi- 
vidual gain.  We  observe  frequently  the  same  tendency 
in  the  increased  centralization  of  our  national  government. 
While  in  the  smaller  communities  of  local  government^ 
where  less  selfishness  is  concentrated,  the  will  of  the  people 
is  more  nearly  expressed.  But  the  political  dangers  of 
socialism  are  entirely  overlooked  by  the  socialists.  They 
have  not  accounted  for  the  vagaries  of  human  nature,  which 
have  existed  from  the  time  when  man  first  began  to 
struggle  with  his  fellows  for  subsistence. 

Beforma  Proceed  from  Local  Government. 

It  is  also  to  be  observed  in  the  history  of  the  development 
of  government  that  all  reforms  have  proceeded  from  local 
conditions  to  the  central  government,  and  not  in  an  op- 
posite way.  If  this  is  universally  true,  are  not  socialists 
moving  in  the  wrong  direction  in  trying  to  establish 
a  general  law  which  shall  regulate  individual  practice 
rather  than  trying  to  modify  individual  and  local  practice, 
thus  seeking  to  reform  the  central  government  ?  Recogniz- 
ing this  as  a  natural  method  for  all  reforms,  it  would 
seem  more  rational  for  socialists  who  are  desirous  of  bene- 
fitting humanity  to  establish  themselves  on  some  of  the 
cheap  lands  of  America  and  begin  to  apply  their  social- 
istic doctrine,  and  this  would  put  matters  to  a  practical 
test.  Communists  have  tried  this  experiment  again  and 
again,  and  in  nearly  every  instance  have  failed,  until 
communism  has  become  almost  a  thing  of  the  past.  If 
socialism  should  succeed,  working  along  the  line  of  natural 
development  of  reformatory  methods^ — from  the  local  to 


ECONOMICS.  263 

the  central  government, — the  people  of  the  United  States 
would  hail  with  joy  any  complete  system  whose  success 
could  be  demonstrated.  If  they  failed,  the  dream  would 
be  exploded.  Economic  experiments  where  the  doctrine 
of  socialism  could  be  tested  in  practice  are  highly  desirable 
at  the  present  time.  Those  countries  like  Xew  Zealand, 
which  have  advanced  too  rapidly  with  changes  toward  the 
state  control  of  industries,  have  usually  regretted  it. 

Another  gross  error  into  which  the  advocates  of  this 
system  have  fallen  is  based  upon  the  teaching  of  the  Gospel, 
which  has  been  claimed  by  some  as  a  powerful  force  in  the 
development  of  socialism.  But  if  the  Master  taught  the 
common  brotherhood  of  humanity  and  insisted  upon  justice 
and  mercy,  he  also  taught  that  man  should  not  be  compar- 
ing himself  with  his  fellows  as  a  criterion  for  correct  life. 
But  this  age  has  become  the  age  of  individual,  and,  it 
may  be  said,  invidious  comparisons, — the  age  in  which  we 
estimate  our  life  and  our  prosperity  by  the  lives  and  pros- 
perity of  others,  instead  of  having  in  mind  the  ideal  life, — 
and  this  has  been  extended  more  especially  into  the  indus- 
trial world.  I^^ow  the  wage-earner  compares  his  shelter 
and  his  food,  his  opportunities  for  culture  and  learning^ 
leisure  and  travel,  with  those  of  the  millionaire,  and  he  is 
soured  and  disgusted  with  the  contrast.  Humanity  never 
got  into  a  worse  condition  than  this.  The  spirit  of  extreme 
individual  comparisons  leads  to  malice,  envy,  and  crime. 
The  assumption  that  with  the  state  ownership  of  industries 
these  contrasts  would  disappear,  is  idle  and  chimerical. 

In  the  adjustment  of  social  rights  these  facts  must  be 
regarded  as  fundamental  to  the.great  law  of  social  progress. 
There  is  not  only  a  diversity  of  employment  in  the  world, 


264 


ECONOMICS. 


but  a  diversity  of  human  capacities  and  characteristics; 
indeed,  the  fundamental  progress  of  the  universe  rests 
upon  this  variety  of  life.  Under  a  socialistic  system  some 
must  be  employed  as  officers  of  the  state  in  great  com- 
mercial enterprises,  which  means  that  others  must  do 
servile  work,  and  in  fact  an  entire  gradation  of  em- 
ployments from  the  highest  to  the  lowest  must  continue  to 
exist.  Is  it  to  be  supposed  for  an  instant  that  where  the 
spirit  of  comparison  of  the  benefits  of  this  life  exists, 
which  is  born  of  selfishness  and  distrust,  of  ambition  and 
avarice,  that  we  shall  have  any  less  inequality  because  of 
a  sudden  transition  to  state  exploitation  of  all  industries  ? 
Such  an  assumption  is  unwarranted  and  unfounded.  In- 
deed, under  the  present  status  of  human  society,  the  most 
complete  institutions  and  theoretically  correct  principles 
and  methods  are  liable  to  abuse  by  men  in  power,  and  until 
the  slow  process  of  the  regeneration  of  human  nature 
reaches  a  higher  state,  until,  step  by  step,  the  evil  practices 
have  been  eliminated,  we  cannot  count  on  any  improved 
condition  of  humanity  by  a  transition  to  socialistic  usage. 
Those  who  earnestly  advocate  this  doctrine  have  appar- 
ently failed  to  observe  that  the  social  misery  of  to-day  is 
not  wholly  dependent  upon  capitalistic  production,  for 
the  world  at  large  is  in  better  condition  now  than  ever 
before.  And  if  there  has  been  a  slow  evolution  of  justice 
in  capitalistic  production  during  the  past  century,  is  it  not 
fair  to  assume  that  it  is  better  to  continue  in  this  slow 
process  of  development  rather  than  venture  suddenly  upon 
an  unknown  sea  without  chart  or  compass,  and  no  guide 
save  the  dreams  of  theorists,  which  have  been  accumulating 
for  the  past  two  thousand  years  ?     Moreover,  everybody 


ECONOMICS. 


265 


admits  the  rapidity  of  production  under  the  individual 
system.  Apparently  the  socialists  have  failed  to  realize 
that  there  will  be  an  immediate  f  alling-off  in  the  production 
of  economic  goods  the  moment  that  state  socialism  pre- 
vails; and  in  view  of  the  fact  that  socialism  promises  a 
large  return  to  every  man^  how  will  this  larger  return  be 
made  possible  ?  It  is  quite  easy  to  see  that  a  change  from 
the  present  economic  system  to  a  socialistic  regime  would 
not  eliminate  the  evils  of  economic  society.  It  is  quite 
difficult  to  apply  the  socialistic  doctrine  to  the  practical 
affairs  of  life.  At  best,  economic  systems  grow ;  they  are 
not  made  to  order,  nor  are  they  thrust  aside  at  the  behest 
of  political  government. 

Nature  of  Progress. 

Progress  is  essential  to  the  life  of  society.  The  struggle 
for  existence  is  essential  to  progress.  There  are  two 
pictures :  one  represents  man  struggling  against  external 
nature  for  protection,  and  against  his  fellows  in  competi- 
tion; the  other  represents  man  struggling  for  the  exist- 
ence of  others,  and  cooperating  with  his  fellows  in  the 
production  of  wealth.  The  two  blend  in  one  genuine  pic- 
ture of  social  progress.  The  one  represents  the  personal 
struggle  for  existence,  the  other  the  social  struggle  for  the 
existence  of  others.  If  either  be  suppressed,  modern  prog- 
ress ceases.  The  personal  struggle  for  existence  is  essen- 
tial to  wholesome  individual  life;  it  is  necessary  for 
a  perfect  social  fabric.  So  far  as  socialism  suppresses  or 
advocates  the  suppression  of  this  personal  struggle,  it  is 
detrimental  to  the  best  interests  of  social  life.  So  far  as 
it  attempts  to  guarantee  the  support  of  all  through  a  com- 
mon center,  and  remove  responsibility  from  the  individuals 


^Q^  ECONOMICS. 

and  families,  so  surely  will  the  laws  of  social  evolution  be 
violated  and  social  degeneracy  set  in.  There  must  be 
a  survival  of  the  fittest  to  associate,  the  fittest  to  cooperate, 
if  the  social  structure  is  to  grow.  This  survival  can  only 
be  tested  by  individual  struggle  and  diversity  of  life. 

It  is  properly  held  that  nature  likes  uniformity  of  law 
and  ignores  uniformity  of  the  species.  Variety  in  life  is 
essential  to  existence.  So  far  as  the  social  organism  is  a 
natural  body,  the  same  law  holds  good;  equality  and  uni- 
formity are  ignored  as  non-progressive,  while  diversity 
and  variety  are  deemed  essential  to  the  existence  of  the 
social  body. 

No  Formula  for  Reform. 

Remedies  for  existing  evils  may  not  be  discussed  fully, 
but  it  may  be  suggested  that  more  attention  be  given  to 
character  in  proportion  to  intellect.  The  highest  type  of 
cooperative  individual  is  dependent  fully  as  much  upon 
character  as  intellect.  Among  modern  reformers  too  much 
stress  has  been  placed  upon  mere  intellect  as  causation  in 
social  evolution,  and  too  little  upon  character.  Too  much 
stress  has  also  been  laid  upon  the  power  of  the  general  will 
to  force  social  reform.  Thousands  of  reformers  crying  in 
the  market-place  that  something  ought  to  be  done  have 
brought  on  a  condition  of  expectancy  that  something  would 
be  done,  and  the  individual  has  looked  to  the  government, 
to  society,  to  chance,  and  even  to  Providence  for  help_, 
while  his  degenerate  feet  alloAved  him  to  slip  into  the 
great  social  residuum  that  exists  on  the  borders  of  pauper- 
ism and  crime.  We  need  to  teach  and  to  learn  individual 
responsibility,  in  the  home,  in  the  school,  in  the  churchy 
in  the  civil  government.    With  it  social  responsibility  will 


ECONOMICS. 


267 


come  as  a  natural  sequence,  for  individual  responsibility 
must  include  responsibility  of  education,  power  and  wealth, 
as  well  as  the  responsibility  of  self-preservation.  This 
can  all  be  acquired  under  the  present  economic  regime. 
The  system  may  be  modified,  but  it  will  not  break  down. 
The  highest  phases  of  culture  and  learning  are  accom- 
panied by  the  worst  forms  of  degeneration;  wealth  and 
poverty,  generosity  and  selfishness,  justice  and  inhumanity^ 
virtue  and  vice,  exist  side  by  side.  There  is  no  patent 
cure  for  all  our  ills.  When  a  man  has  a  measure  which 
he  claims,  if  adopted  by  the  government,  will  regenerate 
society,  banish  strife  and  selfishness,  eliminate  poverty 
and  distress,  cure  pauperism  and  crime,  one  should  regard 
it  in  the  same  light  as  the  patent  medicine  which  proposes 
to  cure  all  bodily  infirmities.  Society  cannot  be  cured 
by  the  direct  application  of  nostrums.  And  it  is  evident 
to-day,  as  we  look  out  at  this  great  social  struggle ;  as  we 
observe  the  grinding  of  the  millions  in  their  ceaseless 
round  of  anxiety,  strife  and  care ;  as  we  see  the  inhumanity 
of  man  to  man,  the  injustice,  wretchedness  and  crime  in 
the  world, — indeed,  as  we  behold  all  this,  there  is  but  one 
permanent  cure,  and  that  is  education.  The  development 
of  individual  powers,  individual  life,  individual  culture, 
and  the  preparation  of  that  individual  for  the  active  social 
duties  of  life, — this  alone  will  preserve  the  present  and 
insure  the  future.  But  this  must  include  the  development 
of  moral  character,  moral  courage,  and  moral  responsibility 
of  the  lives  of  others,  while  we  insist  upon  intellectual 
quickening.  We  shall  solve  the  problem  of  life  by  develop- 
ing what  is  best  in  ourselves  and  in  those  with  whom 
we  come  in  contact.    Out  of  this  must  come  the  regulating 


268  ECONOMICS. 

power  that  will  eliminate  selfishness  and  bring  about  jus- 
tice in  the  existing  economic  order. 

The  prosperity  of  a  nation  rests  upon  the  character  of 
individuals.  As  Mr.  Lecky  well  said,  concerning  the  pros- 
perity of  a  nation,  in  his  essay  on  the  Political  Value  of 
History :  "  Its  foundation  is  laid  in  pure  domestic  life, 
in  commercial  integrity,  in  high  standard  of  moral  worth 
and  of  public  spirit  and  simple  habits,  in  courage,  upright- 
ness, a  certain  soundness  and  moderation  of  judgment 
that  springs  quite  as  much  from  character  as  intellect." 
As  these  qualities  and  characteristics  increase  and  pre- 
dominate, the  national  life  grows  better;  as  they  decline^ 
it  degenerates. 

References:  Ely,  R.  T.,  Socialism  and  Social  Reform;  Ely, 
R.  T.,  French  and  German  Socialism ;  Bellamy,  Edward,  Looking 
Backward;  Bellamy, Edward, Equality ;  Webb, Sidney, and  others, 
Fabian  Essays  on  Socialism ;  Schafffe,  Quintessence  of  Socialism  ; 
Flint,  Robert,  Socialism. 


PART  III. 

CONSUMPTION. 


CHAPTEK   I. 
NATURE  OF  CONSUMPTION, 

Consumption  Begulates  Production. 

The  amount  of  goods  consumed  is  in  one  sense  a  record 
of  the  degree  of  satisfaction  of  wants,  and  as  demand 
always  springs  from  a  desire  to  consume,  in  modern  eco- 
nomic processes  the  amount  manufactured  will  depend 
to  a  large  extent  on  the  amount  demanded;  hence  it  is 
that  consumption  limits  production.  While  no  goods  can 
be  consumed  until  they  are  produced,  and  in  the  mechan- 
ical process  consumption  must  be  preceded  by  production^ 
consumption  after  all  stimulates  desire.  This  principle 
is  carefully  observed  in  the  causes  and  processes  of  panics. 
As  soon  as  consumption  falls  off,  or,  indeed,  as  soon  as 
a  distrust  arises  that  people  will  not  consume  what  is  pro- 
duced, production  ceases  and  there  follows  a  trade  de- 
pression. In  the  revival  from  panics  it  is  the  desire  for 
goods,  or  consumption,  which  sets  the  wheels  of  industry 
going.  So  important  is  this  question  of  consumption  in 
relation  to  production,  that  some  authors  have  laid  it  down 
as  the  first  principle  in  economics;    however,  it  is  only 

(260) 


270  ECONOMICS. 

througli  the  law  of  supply  and  demand  that  it  takes  prece- 
dence. 

Consumption  Inseparable  from  Production. 

Whichever  way  consumption  may  be  considered,  it  is 
inseparable  from  production.  The  whole  economic  struc- 
ture rests  upon  the  principle  of  the  satisfaction  of  human 
wants.  The  effort  of  mankind  to  obtain  material  objects 
or  goods  or  the  services  of  others  in  satisfaction  of  wants^ 
is  the  fundamental  principle  of  the  science.  In  the  satis- 
faction, then,  of  these  material  wants,  we  find  the  formal 
basis  of  active  life.  The  primary  basis  is  the  satisfaction 
of  the  merely  animal  wants,  such  as  food,  drink,  clothing^ 
shelter;  these  are  the  things  that  men  strive  for  every- 
where. As  man's  nature  evolves  he  finds  it  expanding 
into  a  thousand  wants  and  desires,  built  upon  the  economic 
life  as  the  formal  basis  of  the  superstructure  of  civiliza- 
tion. Men  toil  to  satisfy  the  wants  of  religion,  to  pro- 
mote the  moral  nature  and  the  aesthetic  faculties.  Consid- 
ering the  social  conditions  of  mankind,  we  find  this  idea 
expanding  into  railroads,  highways,  sanitation,  education^ 
public  parks,  institutions  for  the  care  of  the  weak,  indeed 
into   all  public  needs  which  must  be  met  by  economic 

activity. 

Variety  of  Human  Wants. 

In  the  savage  state  man's  wants  are  fcAv,  and  it  takes 
his  entire  life  to  satisfy  them.  As  civilization  increases, 
desires  multiply,  wants  become  innumerable,  and  renewed 
effort  must  be  put  forth  to  satisfy  them.  By  increased 
intelligence,  which  enables  man  to  use  the  power  of  inven- 
tion and  to  apply  the  forces  of  nature,  he  is  enabled  to 
multiply  the  means  for  the  satisfaction  of  wants.     We 


ECONOMICS. 


271 


seek  everywhere  for  the  qualities  embodied  in  material 
objects  to  satisfy  our  needs.  We  also  seek  the  personal 
services  of  others.  We  desire  food  and  clothing  and  objects 
of  art  and  beauty,  and  so,  on  the  other  hand,  we  desire  to 
travel  and  to  employ  the  services  of  others  in  conveying 
us  from  place  to  place. 

Degree  of  Want. 
Each  individual  arranges  his  wants  in  the  order  of 
their  importance,  but  the  degree  of  importance  of  the 
wants  of  different  individuals  varies.  The  chief  desire  of 
one  man  may  be  for  a  coat,  of  another  for  warm  food,  while 
the  chief  demand  of  a  wealthy  person  may  be  a  thousand- 
dollar  painting  or  a  five-thousand-dollar  horse.  The  de- 
gree of  intensity  w^ith  which  people  desire  certain  things 
has  a  vast  deal  to  do  with  the  regulation  of  the  kind  and 
amount  of  consumption,  as  well  as  the  development  of  the 
prices  of  production.  As  civilization  progresses  there  is 
comparatively  less  time  spent  obtaining  the  bare  neces- 
saries of  life,  such  as  food,  clothing,  and  shelter ;  and  more, 
proportionately,  in  obtaining  those  which  lead  to  intellec- 
tual culture, — more  spent  in  the  development  of  the  deriv- 
ative qualities  of  mankind.  In  an  actual  social  organiza- 
tion, education,  art  and  literature  may  not  be  essential 
for  the  perpetuation  of  life  or  the  perpetuation  of  the 
species,  but  they  are  essential  to  its  higher  development. 
To  that  extent  culture  is  desirable.  It  produces  a  better 
life  and  a  better  class  of  people. 

Satisfaction  of  Economic  Wants. 

In  Political  Economy  we  have  to  deal  with  only  the 
satisfaction  of  economic  wants,  chiefly  material  goods. 
Such  goods  as  nature  has  furnished  in  abundance,  like 


272  ECONOMICS. 

water,  air,  sunlight,  are  not  economic  wants;  they  are 
called  free  goods,  and  are  not  subject  to  the  processes  of 
economy.  However,  these  have  a  tendency  more  and  more 
to  be  appropriable  in  service  or  material.  Water  in  the 
cities  has  become  an  economic  good ;  also,  for  the  purpose 
of  irrigation,  it  is  bought  and  sold.  It  may  be  that  the 
service  performed  is  the  chief  consideration,  but  in  reality 
it  is  the  furnishing  of  the  economic  good  that  determines 
the  economic  condition.  Air  pumped  into  rhines  and 
tunnels  may  become  an  economic  good  as  it  is  bought  and 
sold  in  the  market,  and  would  have  under  such  circum- 
stances an  economic  value  the  same  as  food  or  clothing. 
If  sunlight  should  be  concentrated  so  as  to  run  engines, 
power  might  be  developed  in  that  way  and  sun-heat  would 
become  an  economic  good.  The  generation  of  electricity, 
which  is  free  to  all  everywhere,  when  transmuted  into 
power  becomes  an  economic  good,  and  electrical  power 
is  bought  and  sold.  So  we  shall  find  that  in  the  process 
of  development  man  enlarges  his  sphere  of  activity  from 
time  to  time  and  the  purely  economic  goods  encroach 
upon  the  free  goods,  appropriating  to  themselves  goods 
which  were  formerly  free. 

Immediate  Consumption  and  Final  Consumption. 
All  goods  are  produced  for  the  sake  of  consumption. 
Some  of  these  are  for  immediate  consumption  in  the  grat- 
ification of  wants,  such  as  food  for  the  sustenance  of  life, 
or  raw  material  for  the  production  of  other  goods,  as  coal. 
Final  consumption  is  the  last  use  of  an  article,  and  means 
the  last  use  it  is  put  to  in  the  development  of  the  economic 
process.  Thus,  trees  are  consumed  in  furnishing  lumber ; 
lumber  passes  through  the  planing  mill  and  subsequently 


ECONOMICS. 


273 


is  made  into  articles  of  furniture.  The  use  of  the  furniture 
is  the  last  use  of  the  lumber.  The  consumption  of  wealth 
is  necessary  for  the  production  of  other  wealth.  Thus^ 
that  portion  which  is  set  apart  for  the  furnishing  of  means 
for  producing  other  wealth  is  called  capital.  Its  object 
is  consumption.  The  final  consumption  represents  the 
destruction  of  the  utility. 

Productive  Consumption. 
Productive  consumption  is  that  in  which  the  value  re- 
appears in  the  utility  of  the  finished  product.  Thus,  coal 
used  in  creating  power  passes  through  the  process  of 
being  consumed  and  reappears  in  the  value  of  the  finished 
product.  The  coal  which  is  used  for  heating  purposes 
only  is  consumed  in  the  final  act ;  it  has  served  its  economic 
process  there.  But  the  economic  procss's  in  production  is 
entirely  different.  Many  goods  serve  as  raw  materials 
in  the  manufacture  of  finished  products ;  also,  tools  and 
machines  are  consumed  in  the  production  of  other  articles, 
the  ultimate  aim  of  the  whole  process.  The  consumption 
of  goods  by  the  laborer  is  sometimes  said  to  be  productive 
consumption,  but  this  can  only  be  true  in  the  case  of  the 
consumption  of  such  articles  as  are  a  necessary  part  of  the 
process  of  production  by  the  laborer.  For  consumption  by 
man  is  the  aim  of  all  production;  when  goods  have  been 
consumed  thus,  their  economic  purpose  is  fulfilled,  unless 
otherwise  intended  as  stated. 

Consumer's  Profits. 
In  consumption  all  are  looking  for  the  largest  use  of 
material  goods.     Producers  create  goods  for  the  purpose 
of  selling  in  order  that  they  may  realize  a  margin  of 
—18 


274  ECONOMICS. 

profit.  The  consumers  buy  them  in  the  cheapest  market 
with  the  expectation  of  obtaining  some  advantage  in  buy- 
ing. There  is  always  competition  in  buying  as  well  as 
competition  in  selling.  While  those  selling  hope  to  make 
good  terms  for  themselves,  those  buying  desire  to  retain 
the  advantage  on  their  side.  Thus,  competition  tends  to 
reduce  the  purchasing  price,  which  would  yield  a  profit 
to  individuals.  All  distributive  cooperative  institutions 
have  for  their  purpose  the  making  of  profits,  which  arise 
from  careful  purchasing  for  the  consumer. 

References:    See  following  chapter. 


ECONOMICS. 


275 


CHAPTEK  II. 

CONSUMPTION  AND  SAVING. 

Analysis  of  Consumption. 
It  is  held  by  some  that  consumption,  being  essentially 
an  entire  destruction  of  utilities,  is  always  accompanied 
by  a  saving  process ;  viz.,  as  to  what  will  yield  the  highest 
return  on  money  expended.  In  consumption,  people  are 
always  studying  as  to  what  most  advantageous  use  wealth 
may  be  devoted,  and  then  there  follows  another  proposition 
of  how  this  may  best  be  demonstrated.  There  could  be 
a  better  ordering  of  the  methods  of  consumption  without 
any  real  retrenchment  in  the  amount  consumed.  It  re- 
quires a  careful  study  as  to  what  should  be  used.  Economy 
in  consumption  is  a  very  important  subject;  and  by  that 
we  do  not  necessarily  mean  abstinence  or  niggardliness,  but 
a  careful  and  thoughtful  study  of  how  to  get  the  largest 
return   for  the  expenditure. 

EngePs  Law. 

A  careful  study  of  the  statistics  of  consumption  shows 
that  there  is  a  relative  order  of  expenditure  for  different 
individuals.  Various  investigations  have  taken  place  in* 
Europe  and  America  to  show  the  relative  per  cents,  of 
income  expended  in  the  different  ways  for  food,  clothing, 
rent,  fuel,  etc.  The  first  definite  results  of  investigations 
were  published  in  1867  by  Dr.  Schwabe,  chief  of  the 
Municipal  Statistics  Bureau  of  Berlin,  on  the  relations 


276 


ECONOMICS. 


between  rent  and  income.     The  following  table  summa- 
rized his  results : 

When  the  income  is:  Then  the  expenditure  for  rent  is: 

900  marks, 216.09  marks,  or  24.10  per  cent. 

1,500      "       


2,250 
3,000 
4,500 
6,000 
9,000 
15,000 
30,000 


231.65 

'*  22.10  **   ' 

450.00 

"  20.00  **   * 

825.50 

"  27.50  ''   ' 

1,052.55 

''  23.39  *'   ' 

1,208.60 

♦'  20.56  "  ' 

1,566.00 

"  17.40  "   * 

2,020.50 

u   1347  u      , 

2,760.00   ' 

*    "  9.20  *'   * 

This  social  law,  which  states  that  ^^the  greater  the  income 
the  smaller  is  the  proportion  expended  for  rent,"  has  often 
been  called  Schwabe's  law — ^'das  Schivahesche  Gesetz.^^ 
Later,  Dr.  Engel  of  the  Royal  Prussian  Bureau  extended 
this  ^'social  law"  to  all  the  necessaries  of  life,  and  in  its 
more  expanded  form  the  law  is  usually  called  "  EngeFs 
law." 

As  income  increases,  the  relative  expenditure  in  the 
different  lists  changes ;  but  there  are  certain  constant  laws 
of  relations  of  expenditure,  derived  from  statistics.  These 
are  mainly  as  follows: — First,  the  law  of  constant  per- 
centage: as  income  of  family  increases,  the  percentages 
of  expenditure  for  clothing  remain  approximately  the 
same;  expenditures  for  rent,  fuel  and  light  remain  in- 
variably the  same.  Second,  the  laws  of  variation :  as  the 
income  of  the  family  increases,  a  smaller  percentage  of 
it  is  spent  for  food.  As  the  income  of  the  family  in- 
creases, a  steadily  increasing  percentage  is  expended  for 
education,  health,  recreation,  amusement,  etc. 

Of  a  large  number  of  cases  in  Germany  it  is  shown 
that  the  per  cent,  spent  for  clothing  ranges  from  16  to 
18,  in  Europe  from  14.8  to  19.8,  while  in  the  United 


ECONOMICS. 


277 


States  the  clothing  expenditure  ranges  from  12.82  to  16.84, 
showing  a  slight  variation  in  the  changes  of  income.  While 
rent  in  the  United  States  is  from  12.59  to  15.98  per  cent., 
it  is  from  9.38  to  11.93  in  Europe.  It  is  seen  by  this 
that  the  subject  of  rent  varies  somewhat,  though  it  may  be 
regular  enough  with  clothing  to  be  included  in  the  constant 
or  relatively  constant  laws.  Food  varies  from  50  to  62 
per  cent,  in  Germany,  44  to  50.06  per  cent,  in  all  Europe, 
and  28.63  to  49.64  per  cent,  in  the  United  States.  The 
following  tables  illustrate  these  laws.  They  also  point  out 
a  great  lesson  in  social  economics :  that  the  wants  of  higher 
civilization  caused  by  education  and  a  higher  standard  of 
life  are  not  satisfied  with  the  present  economic  or  indus- 
trial system.  The  ordinary  family  still  has  insufficient 
income  over  the  bare  necessaries  to  satisfy  desires  to  the 
extent  of  producing  happiness  and  contentment.  The  re- 
form should  begin  with  consumption,  if  the  individual 
is  to  satisfy  common  wants  and  have  a  margin  for  the 
satisfaction  of  extra  desires. 

PRUSSIAN   STATISTICS.— ENGEL'S  LAW. 


Items  of  expenditure  of  a  family 
of  the  middle  clasu. 


Subsiitence 

Clothing 

Lodging 

Firing  and  lighting 

Education,  public  worship,  etc 

Legal  protection 

Care  of  health 

Comfort,  mental  and  bodily  recreation 


Total 


Percentage  of  the  expenditure  of  the  family  of 
a  man  with  an  income  of  from  — 


$226  to  $300.  $460  to  $600.        $760  to  $1,000. 


100.0 


100.0 


Per  cent. 
60.0^ 
18.0 
12.0 

5.0. 

6.6^ 

3.0 

3.0 

8.6, 


15.0 


100.0 


■*'Thi8  should  be  2.6,  to  make  even  per  cent. 


2T& 


ECONOMICS. 


PERCENTAGE   OF  EXPENDITURE  FOR  FAMILIES   OF  DIFFERENT  INCOMES 


Object  of  expenditure. 


Income 
under 
$200. 

Income 

Income 

Income 

Income 

$300 
to 

$400. 

$500 

to 

$600. 

$700 

to 
$800. 

$900 

to 

$1,000. 

Pr.  ct. 

Pr.  ct. 

Pr,  ct. 

Pr.  ct. 

Pr.  ct. 

15.48 

14.98 

15.15 

15.60 

14.96 

7.07 

6.04 

6.63 

4.42 

4.00 

1.01 

.98 

.97 

.88 

.74 

12.82 

14.14 

15.27 

16.33 

16.84 

49.64 

45.59 

43.84 

38.89 

34.34 

13.98 

18.27 

19.14 

23.88 

29.12 

9.38 

11.93 

10.26 

9.49 

10.49 

5.38 

5.49 

3.32 

3.97 

5.19 

1.66 

1.59 

1.37 

1.20 

1.53 

19.08 

14.18 

15.21 

18.97 

14.15 

48.32 

49.58 

50.06 

44.00 

46.24 

16.18 

17.23 

19.78 

22.37 

22.40 

Income 

$1,200 

and 

over. 


United  States. 

Rent 

Fuel 

Lighting 

Clothing 

Food 

All  other  purposes 

EUBOFK. 

Rent 

Fuel 

Lighting 

Clothing 

Food 

All  other  purposes 


Pr.  ct, 
12.59 
2.67 
.45 
15,71 
28.63 
40.05 


It  will  be  interesting  to  study  the  following  comparative 
percentages  of  expenditures  of  the  families  of  working- 
men  in  Illinois,  Massachusetts,  Great  Britain,  and  Prus- 
sia.* 


Items. 

Illinois. 

Masaa- 
chutetts. 

Great 
Britain. 

Prussia. 

Average. 

Subsistence 

41.38 
21.00 
17.42 
5.63 
14.57 

49.28 
15.95 
19.74 
4.30 
10.73 

51.36 
18.12 
13.48 
3.50 
13.54 

55.00 
18.00 
12.00 
5.00 
10.00 

49.25 

Clothing 

18.27 

Rent 

Fuel 

15.66 
4  61 

12.21 

Total 

100.00 

100.00 

100.00 

100.00 

100,00 

While  the  table  shows  in  a  rough  way  the  comparative 
percentages  of  expenditure,  in  another  way  it  determines 
but  little.  Take  the  item  of  subsistence,  for  example: 
it  is  not  shown  whether  the  family  in  Great  Britain  that 
expends  51.36  per  cent,  of  the  income  for  food  is  better 
or  worse  fed  than  the  family  in  Illinois  that  spends  41.38 
per  cent,  for  the  same,  but  it  shows  that  the  largest  item 
of  expense  in  Great  Britain  is  food.     The  table  shows  that 


*From  Elf's  Outline  of  Economics,  p.  245. 


ECOI>rOMICS. 


279 


rent  is  a  greater  item  of  expense  in  Massachusetts  than  in 
Germany  or  Great  Britain,  but  does  not  show  how^  the 
family  lives.  While  there  is  a  tendency  everywhere  for 
a  family  of  certain  grade  to  seek  the  same  relative  home 
in  proportion  to  income,  it  is  not  sufficiently  constant  to 
show  any  positive  relation.  Are  rents  higher  in  Massa- 
chusetts than  in  Great  Britain  for  the  same  quality  of 

house  ? 

Inducements  to  Save. 

Inducements  that  persons  have  held  out  to  them  for 

saving  are,  that  the  same  articles  may  be  consumed  in 

another  way,  yielding  a   larger   amount  of  satisfaction. 

When  the  standard  of  life  is  once  established,  it  requires 

a  certain  amount  of  various  articles  to  satisfy  it.     If  the 

standard  is  raised,  there  must  be  a  larger  expenditure  in 

certain  lines  for  its  satisfaction.     Economy  in  this  respect 

consists  in  saving  from  useless  or  needless  expenditure, 

with  the  expectation  of  receiving  a  larger  benefit  from  the 

goods  expended  in  some  other  way. 

Spending  and  Saving. 
There  are  those  who  hold  to  the  doctrine  that  spending 
should  be  practiced  freely  in  order  to  make  times  good; 
that  is,  the  more  we  spend  the  greater  will  be  the  circula- 
tion of  money  and  the  better  will  trade  be.  This,  however^ 
has  its  limitations.  Money  expended  in  the  gratification 
of  rational  wants,  it  is  true,  will  lead  to  rational  production 
and  proper  consumption;  but  money  or  wealth  expended 
in  uselessness  may  create  as  much  evil  as  good,  and  if  all 
were  to  squander  alike  with  prodigality  there  would  be  no 
wealth  used  for  the  purpose  of  carrying  on  the  processes 
of  production. 


280  ECONOMICS. 

Luxury. 
The  term  luxury  is  relative.  In  an  economic  sense  it 
must  be  confined  to  extravagance  and  prodigality.  There 
is  no  general  law  telling  what  luxury  is,  for  luxury  to  one 
person  might  not  be  luxury  to  another.  The  luxuries  of 
one  individual  may  be  the  commonplace  articles  of  another_, 
and  the  luxuries  of  one  generation  may  become  the  neces- 
saries of  the  next.  The  money  that  is  expended  in  riotous 
living  is  a  direct  waste,  and  the  money  expended  in  excess- 
ive luxury  might  be  devoted  in  a  larger  return  to  society. 
The  millionaire's  palace  might  build  a  hundred  good  homes 
for  people  of  ordinary  means  and  taste,  and  it  is  a  question 
whether  his  life-work  demands  any  such  outlay,  or  whether 
it  is  necessary  for  his  best  interests.  Viewed  in  this  light^ 
it  appears  that  much  of  the  expenditures  of  life  are  useless. 
The  luxurious  wine  supper  cannot  yield  a  suiScient  pleas- 
ure for  the  amount  of  waste  incurred,  hence  it  is  a  luxury. 
Whisky,  beer  and  tobacco  are  worse  than  luxuries, — they 
are  a  waste,  because  of  the  evil  effects  on  the  body.  The 
wants  of  a  community  are  never  satisfied,  for  as  we  go  on 
developing  we  increase  the  number  of  our  unsatisfied  de- 
sires, which  are  limitless.  Luxurious  expenditure  can  only 
be  justified  when  results  are  obtained  in  proportion  to  the 
sacrifice.  A  man  might  burn  a  house  for  the  sake  of 
amusing  himself  with  the  play  of  the  flames.  It  is  evi- 
dent that  the  small  amount  of  gratification  has  cost  a  very 
large  expenditure,  and  is  out  of  all  proportion  to  real 
economic  consumption.  Though  the  house  were  his  own, 
he  would  violate  moral  obligations  in  consuming  materials 
which  had  cost  years  of  labor  and  might  be  made  useful 
in  many  ways. 


ECONOMICS.  281 

Economic  Expenditure  and  Waste. 
The  person  who,  having  to  consume  articles  of  useful- 
ness, does  this  in  a  careless  and  wasteful  manner,  violates 
his  moral  obligations  to  the  community.  Hence  the  hu- 
man race  would  be  greatly  benefited  if  we  could  have 
economy  of  food  consumption.  Now  economy  of  food  does 
not  mean  that  the  body  should  be  stinted,  but  only  means 
that  economy  should  be  used  in  its  selection  and  in  the 
proper  preparation  for  its  proper  use.  Thus  we  should 
have  the  largest  return  for  the  expenditure.  This  is  what 
is  meant  by  saving ;  it  is  not  hoarding  articles  for  the  pur- 
pose of  gratification  of  bare  possession,  but  for  the  purpose 
of  seeking  out  the  largest  return  for  goods  in  hand.  There- 
fore, when  persons  put  money  in  savings  banks  it  is  for 
the  purpose  of  getting  a  larger  return  in  some  other  way 
than  by  the  gratification  of  present  desires.  If  a  person 
refrains  from  buying  a  hat  when  he  does  not  really  need 
it,  it  is  for  the  purpose  of  spending  the  money  for  some 
want  yet  unsatisfied.  Hence,  saving  is  a  relative  term, 
and  economy  is  economy  in  use.  In  the  use  of  food,  for 
instance,  there  might  be  selected  expensive  foods  contain- 
ing little  real  nutriment ;  or  foods  might  be  selected  which 
would  not  satisfy  the  wants  of  the  family;  or  food  could 
be  wasted,  thrown  away,  and  badly  prepared;  and  again, 
there  might  be  a  great  deal  of  expensiveness  in  its  prepara- 
tion.   All  of  these  things  are  absolute  waste. 

The  Desirability  of  Saving. 

There  are  very  many  reasons  why  saving  represents  an 

economic  advantage.     It  teaches  the  individual  thrift  and 

frugality,  including  habits  of  caring  for  himself,  which  is 

an  insurance  against  the  destruction  of  labor  by  poverty 


282 


ECONOMICS. 


and  sickness.  It  is  an  insurance  against  reverses  in  busi- 
ness, which  tides  the  individual  over  in  times  of  apparent 
stress,  but  it  also  enables  the  use  of  large  amounts  of  wealth 
in  a  productive  enterprise  which  otherwise  would  be  con- 
sumed at  once.  ISTevertheless,  the  question  of  saving  may 
be  carried  too  far.  If  one  continues  to  save  to  the  detri- 
ment of  his  everyday  business  or  his  everyday  work,  it 
may  be  in  the  long  run  a  hindrance  to  economic  progress. 
Sometimes  saving  is  carried  on  to  the  extent  of  impairing 
a  business  by  diverting  free  capital  from  one  channel  into 
another.  Examples  of  this  kind  are  found  where  excessive 
life  insurance  is  taken,  or  where  a  business  is  entered 
which  requires  excessive  payments  or  assessments. 

It  is  sometimes  argued  by  individuals  that  it  is  a  good 
thing  to  spend,  because  it  puts  money  into  circulation  and 
makes  times  good.  While  this  is  not  a  good  argument 
taken  as  a  whole,  there  are  elements  of  truth  in  it.  A  com- 
munity may  be  crippled  by  diverting  free  capital  into 
channels  for  the  purpose  of  yielding  an  ultimate  benefit, 
but  which  in  reality  is  at  an  expense  of  prosperity.  If 
there  is  a  large  amount  of  manufactured  goods  on  the 
market,  the  consumption  of  these  goods  will  have  a  tend- 
ency to  quicken  the  wheels  of  industry  in  old  established 
lines  and  create  a  surplus  of  income  which  may  be  used 
to  create  new  business.  But  if  by  strict  economy  living 
expenses  were  cut  down  one-half,  consumption  falling  off 
to  the  same  extent,  in  order  to  save  this  amount  from  a 
given  enterprise  to  expend  in  another  business  which 
would  take  years  for  an  income,  it  is  plain  that  the  com- 
munity would  suffer  loss.  It  is  a  good  thing  for  a  com- 
munity to  live  well,  to  keep  up  the  standard  of  life,  for 
this  is  true  economy.     Such  savings  as  may  be  had  over 


ECONOMICS. 


283 


and  above  this  good  living  will  not  only  be  an  immediate 
but  an  ultimate  advantage  to  the  community. 

National  Consumption. 

l^ational  consumption  is  a  better  estimate  of  national 
prosperity  than  national  production,  if  different  groups  of 
individuals  are  considered.  It  is  what  an  individual  has 
and  enjoys  that  estimates  his  standard  of  life.  When  we 
say  that  the  per  capita  wealth  of  the  community  is  $1,000, 
we  mean  that  the  accumulations  or  savings  of  wealth 
amount  to  that  much.  'Now  in  what  form  do  we  find  this 
wealth  ?  It  is  in  money,  lands,  houses,  furniture,  clothing, 
books,  machinery,  implements,  etc.  It  means  that  we 
have  that  amount  at  hand  not  consumed.  ^Nevertheless, 
nearly  all  of  this  is  in  the  process  of  consumption.  If  all 
of  these  goods  could  be  stored  in  a  warehouse  awaiting  the 
use  of  the  people  and  there  was  no  demand  for  them,  it 
is  easily  seen  that  the  wealth  of  the  community  would  be 
small.  It  is  through  consumption  that  the  value  of  all 
goods  is  estimated.  If  consumption  were  to  keep  up  with 
production,  day  by  day,  there  could  be  no  such  thing  as 
national  wealth,  and  from  the  fact  that  consumption  does 
not  keep  up  with  production  we  have  a  surplus  on  hand 
which  is  called  capital.  This  accumulation  is  dependent 
upon  the  excess  of  production  over  consumption. 

It  still  remains  true  that  the  prosperity  of  a  nation  is 
dependent  upon  the  perpetual  use  of  this  wealth  in  legiti- 
mate consumption.  In  other  words,  the  condition  of 
national  consumption,  that  is,  the  use  of  all  the  surplus 
earnings  of  a  nation,  will  be  an  index  of  the  national  pros- 
perity. Hence  it  is  the  height  of  economy  to  encourage 
legitimate  consumption  of  goods.    Therefore  the  legitimate 


284 


ECONOMICS. 


consumption  of  wheat,  corn,  clothing,  furniture,  houses, 
and  in  fact  all  goods,  will  be  an  index  of  the  prosperity  of 
the  nation.  Care  should  be  used  to  discriminate  between 
the  large  service  of  goods  and  the  waste  of  goods.  Every- 
thing must  be  put  to  its  highest  possible  use  if  we  wish 
to  reach  the  highest  prosperity.  If  a  large  part  of  the  sur- 
plus earnings  of  a  community  passes  into  savings,  it  may 
thereby  curtail  expenditure  in  such  a  way  as  to  destroy  the 
well-being  of  the  community.  While  the  encouragement 
of  saving  by  individuals  in  the  form  of  life  insurance  or 
laying  up  funds  for  future  use  may  in  the  long  run  lead  to 
greater  opportunities  for  the  support  and  production  of 
life,  yet  even  this  may  be  overdone  to  the  extent  of  destroy- 
ing the  working  funds  of  the  community  and  detracting 
from  its  well-being. 

In  the  United  States,  enormous  consumption  of  goods 
has  as  much  to  do  with  the  prosperity  of  the  nation  as  the 
excessive  industrial  power  which  produced  the  goods. 
While  the  opportunity  to  consume  goods  must  logically 
follow  the  production  of  the  goods,  it  is  after  all  the  stim- 
ulus to  production,  and  after  all  the  evidence  of  the  well- 
being  of  the  community.  The  following  table  illustrates 
the  national  consumption  of  certain  classes  of  goods  in  the 
United  States,  for  the  fiscal  year  1905. 


Article. 


Production. 


Home  Consumption. 


Wheat. . 
Cotton . . 
Corn  . . . 
Pig  iron 


Coal. 


Wool. 

Malt  liquors,  and  dis- 
tilled liquors 

Sugar  


552,399,517  bu. 
6,994,281,731  lbs. 
2,464,480,934  bu. 

22,992,380  tons. 
(Calendar  year  1904) 

314,562,881  tons. 

295,488,438  lbs. 

1,718,203,292  gals. 
684,888  tons. 


510,985,324  bu. 
2,749,291,082  lbs. 
2,377,202,894  bu. 
16,561,277  tons. 

244,051,103  tons. 
(Bituminous) 
542,062,536  lbs. 

1,694,392,765  gals. 
2,632,216  tons 


ECONOMICS.  285 

It  is  evident  that  the  large  amount  of  the  consumption 
of  liquors  must  be  to  a  great  extent  a  detriment  rather 
than  an  advantage.  And  also  the  waste  in  the  use  of  flour 
or  meat  in  the  home  consumption  could  not  be  considered 
in  an  estimate  of  well-being,  but  that  this  produce  repre- 
sents the  possibility  of  well-being  to  the  nation. 

Reform  in  Consumption. 

As  consumption  influences  production,  the  improvement 
of  the  economic  methods  will  be  more  readily  made  by 
reforming  our  system  of  consumption.  There  is  competi- 
tion in  buying  or  consumption  as  well  as  in  selling,  and 
the  consumers  who  compete  perpetually  for  lower  prices 
influence  manufacturers  in  making  a  cheaper  article.  A 
retail  dealer  in  shoes  was  one  day  asked  why  he  did  not 
furnish  a  better  quality  of  children's  shoes.  "  Simply  be- 
cause," he  said,  ^^the  people  do  not  wish  to  pay  the  cost  of 
their  making.  Children's  shoes  are  defective  in  manufac- 
ture to  a  large  extent,  and  as  a  child's  shoe  costs  more  than 
a  grown  person's  shoe  in  proportion  to  the  material  in  it, 
parents  are  not  willing  to  pay  the  actual  cost  of  a  well- 
made  child's  shoe.  They  always  ask  when  shown  a  certain 
grade,  ^  Have  you  not  something  cheaper  ? '  Then  the 
dealer  says  to  the  manufacturer,  ^Can  you  not  furnish  me 
something  similar  to  this  of  a  much  cheaper  grade,  to 
supply  the  demand  V  "  And  so  the  cheaper  shoe  is  made. 

Thus  competition  in  buying  is  productive  of  adulterated 
goods  in  almost  every  line.  Goods  are  made  in  these  days 
to  suit  not  only  the  volume  of  commerce,  but  also  the  tastes 
of  the  consumer.  If  we  demand  substantial,  well-made 
goods,  in  which  there  is  no  cheat  or  deceit,  we  must  be 
willing  to  pay  the  cost  of  production  with  a  margin  for 


286  ECONOMICS. 

handling  the  goods.  In  other  words,  we  must  have  healthy^ 
well-fed  laborers,  working  under  a  high  standard  of  life, 
which  means  high  wages  and  a  fair  price  for  the  goods. 
Consumption  can  influence  production  to  a  considerable 
extent.  It  is  not  intended  here  to  argue  against  cheapness 
of  articles,  for  this  is  a  blessing  to  the  poor.  The  applica- 
tion of  modern  invention  and  machinery  to  the  production 
of  goods  permits  us  to  produce  substantial,  well-made. arti- 
cles at  a  low  price  and  by  fair  wages.  But  the  excessive 
cheapness  of  manufactured  articles  is  to  be  avoided. 

Sweating  System. 
There  is  what  is  known  as  the  sweating  system,  or  the 
method  of  taking  articles  to  be  manufactured  in  the  homes 
or  in  small  dingy  apartments,  on  a  contract  to  do  so  many 
pieces  at  a  certain  very  low  price.  The  prices  paid  for 
labor  are  so  low  under  such  circumstances  that  work  must 
be  slighted  in  order  that  people  who  consume  these  goods 
will  have  a  cheap  article.  In  the  long  run  this  cheapness 
is  a  detriment  to  both  consumers  and  producers,  as  well  as 
laborers.  If  it  yielded  an  ample  return  to  the  consumer 
there  might  be  a  grain  of  sense  in  forcing  the  producer  to 
grind  the  laborer  to  create  the  cheap  article  designed.  But 
this  cheapness  is  of  no  benefit  to  the  consumer,  because  it 
gives  virtually  an  article  without  service  at  a  low  price. 
Consumers  scarcely  think  of  this  when  they  go  to  the 
stores  to  purchase,  with  a  tendency  to  beat  down  the  prices 
of  goods  to  the  lowest  notch, — that  is,  demanding  cheaper 
and  cheaper  made  goods.  To  avoid  this,  "consumers- 
leagues'^  are  formed  for  the  purchase  of  goods  made  by 
reliable  houses  where  labor  is  paid  full  living  rates,  and  to 
avoid  the  purchase  of  all  sweat-made  garments,  which  arc 


ECONOMICS.  287 

created  under  the  influence  of  the  poverty  and  wretched- 
ness of  low-grade  labor. 

Waste  in  Consumption. 

It  is  a  difficult  thing  to  purchase  goods  properly  in  the 
market  to  satisfy  our  own  immediate  wants.  Our  wants 
are  so  many  and  so  varied  that  with  limited  means  we 
must  weigh  the  possibility  of  satisfying  first  one,  then  the 
other.  This  is  especially  true  among  the  poorer  classes. 
They  cannot  always  tell  which  they  want  the  most,  or  if 
they  can,  in  their  purchases  they  frequently  fail  in  getting 
what  they  want.  To  be  a  good  purchaser  in  the  market 
with  modern  competition  is  to  know  what  one  wants,  and 
then  estimate  the  ability  to  pay  for  it  in  making  the  pur- 
chase. 

But  having  purchased  the  article,  its  use  for  consump- 
tion is  even  of  greater  importance.  Take,  for  instance, 
the  food  that  is  brought  into  the  kitchen.  In  the  first 
place  there  is  lack  of  economy  in  its  preparation  and  in  its 
cooking,  and  finally  in  its  actual  consumption.  The  Amer- 
icans are  proverbially  an  extravagant,  wasteful  people  in 
this  respect.  It  is  said  they  waste  enough  to  support  an- 
other population  equal  to  their  own.  This  comes  about 
not  entirely  through  carelessness,  but  through  lack  of 
knowledge  and  training  in  the  art  of  consumption.  A 
farmer  will  leave  his  implements  out  in  the  storm  the 
year  around,  and  then  complain  of  hard  luck.  He  will 
leave  his  cattle  without  shelter  and  poorly  fed,  and  then 
wonder  why  he  loses  in  the  business.  We  waste  in  clothing 
by  our  perpetual  change  in  fashion,  and  we  wear  our 
houses  out  long  before  their  time,  because  we  refuse  to 


288 


ECOiq^OMICS. 


keep  them  in  proper  repair.  And  so  for  all  that  we  use  in 
life,  there  is  a  waste  in  consumption. 

It  is  not  that  we  desire  to  have  a  small  consumption  of 
goods,  for  it  is  highly  desirable  that  there  should  be  a 
large  consumption;  but  it  is  only  through  economy  that 
we  are  permitted  to  have  a  large  consumption.  If  Mr.  A 
takes  care  of  one  pair  of  boots  he  may  have  sufficient 
wealth  to  buy  a  hat  or  a  coat,  which  he  otherwise  would 
not  be  able  to  purchase,  or  else  invest  his  money  in  a 
better  way.  With  economy  of  the  flour  and  potatoes  al- 
ready purchased,  people  might  purchase  in  addition  apples 
and  other  things. 

This  principle  is  frequently  carried  into  the  process  of 
consumption.  Business  firms  seeking  to  enlarge  their 
production  and  increase  their  income  frequently  lose  be- 
cause of  their  excess  of  expenditures,  simply  because  their 
processes  of  consumption  were  imperfect. 

Mr.  Bullock,  in  his  Introduction  to  the  Study  of  Eco- 
nomics, shows  that  waste  of  foods  may  occur  in  the  follow- 
ing ways:  First,  needlessly  expensive  foods,  containing 
little  real  nutriment;  second,  failure  to  select  foods  best 
suited  to  the  needs  of  the  family;  third,  a  great  deal 
wasted  which  ought  to  be  used;  fourth,  bad  preparation 
of  food,  which  cai^ses  it  to  lose  its  nutriment;  fifth,  the 
immense  loss  of  fuel  through  badly  constructed  ovens. 
The  author  estimates  that  in  this  way  at  least  one-fifth  of 
all  the  money  spent  for  foods  is  absolutely  wasted.  This 
waste  of  material  could  be  carried  into  every  department 
of  economic  life.  As  business  becomes  more  exact,  there 
is  greater  care  in  consuming  all  of  the  material.  The 
by-products  in  a  gas  factory  or  in  a  smelter  frequently 


ECONOMICS.  289 

yield  a  large  revenue.  The  saving  of  cotton  seed,  which 
formerly  was  wasted,  adds  much  to  the  productivity  of 
cotton-fields.  The  large  packing-houses  at  Kansas  City 
are  good  illustrations  of  the  economy  of  consumption,  for 
every  part  of  the  slaughtered  animal  is  saved  and  turned 
to  economic  use. 

References:  Bullock,  Introduction  to  Economies ;  Phillippovich, 
Grundriss  der  Politischen  Oekonomie;  Seligman,  E.  R.  A.,  Principles 
of  Economics ;  Fetter,  Frank  O.,  Principles  of  Economics. 


■19 


BOOK  III 


EXCHANGE  AND  INDUSTRY. 


(291) 


CHAPTEE  I. 

UTILITY  AND  DEMAND. 

Strugrgle  for  Wealth. 
The  object  of  wealth  is  to  satisfy  wants,  and  the  ceaseless 
struggle  for  existence  is  simply  a  want-satisfying  process. 
We  exploit  mines  for  the  sake  of  iron  to  be  used  in  build- 
ings and  implements ;  for  gold  and  silver  to  be  made  into 
money  and  ornaments;  copper  and  lead  and  zinc  for 
utility  in  the  industrial  arts;  we  till  the  soil  to  produce 
grains,  fruits,  and  cattle  for  food;  we  exploit  the  forests 
to  yield  lumber  for  building  purposes ;  and  we  use  steam, 
water,  electricity,  to  propel  great  machines  for  the  trans- 
formation of  raw  materials  into  articles  of  beauty  and 
usefulness.  The  more  we  have  to  work  with  and  to  live 
for,  the  more  we  want;  our  desires  are  never  satisfied. 
Increased  wealth — that  is,  an  increase  of  economic  goods — 
gives  us  increased  power,  and  we  need  larger  wealth  and 
more  means  to  satisfy  this  power. 

Utility. 
We  desire  these  economic  goods  on  account  of  their 
utility,  and  by  utility  we  mean  their  want-satisfying  power. 
Its  only  test  is  actual  service.  If  a  person  wants  an 
article,  it  is  because  it  has  an  individual  utility.  If  many 
want  the  same  article,  it  has  a  social  utility.  The  utility 
of  goods  is  what  brings  them  into  market  and  disposes  of 
them  wherever  they  perform  the  greatest  service,  and  thus 

(293) 


294  Ecoi^OMics. 

goods  are  distributed  among  tlie  people  wherever  they  are 
demanded  and  in  proportion  to  the  demand. 

Demand  Schedule. 
If  a  single  individual  and  a  single  commodity  on  the 
market  are  considered,  it  will  be  found  that  desire  for 
the  goods  diminishes  as  the  supply  increases.  While  there 
is  an  endless  variety  of  wants,  there  is  a  limit  to  each  sep- 
arate want,  and  it  diminishes  with  every  increase  in  the 
amount  of  the  thing  which  supplies  it.  There  is  in  each 
separate  case  a  diminishing  utility  respecting  every  article. 
There  is  in  the  rational  desires  of  every  person  a  law  of 
satiable  desire.  The  total  utility  of  an  article  or  of  a  com- 
modity on  the  market,  which  is  the  same  as  the  total  want- 
satisfying  power,  increases  with  every  increment  of  a  per- 
son's stock  in  it  ;^  but  it  does  not  increase  as  fast  as  the 
stock  increases.  Thus,  four  horses  will  give  a  greater 
total  utility  than  two,  but  the  utility  is  not  doubled  by 
the  purchase  of  the  two  additional  horses.  If  the  pur- 
chaser continues  to  add  to  his  stock,  each  separate  horse 
of  the  same  grade  will  be  valued  less  than  the  former, 
until  he  reaches  a  place  at  which  he  will  not  pay  anything 
for  a  horse,  but  w^ould  keep  him  if  given  to  him.  The  I 
last  increment  which  he  is  just  induced  to  buy  is  called! 
the  marginal  utility.  Thus,  the  marginal  utility  of  a 
quantity  of  anything  diminishes  with  every  increase  in 
the  amount  which  he  already  has.  (See  illustration  of 
Marginal  Utility,  Fig.  I.)* 

*NoTK. — The  diagrams  used  In  illustrating  demand,  marginal  utility,  value,  etc., 
are  suggested  by  the  advocutes  of  mathematical  economics,  such  aa  Gournot  and 
Jevons,  and  so  extensively  used  by  Marshall  and  adopted  by  Ely,  Commons,  Hadley, 
and  other  American  economists.  It  is  the  universal  method  of  applying  mathematics 
to  economy,  and  Is  used  in  this  work  for  Illustration  and  with  no  idea  of  demon- 
stration. 


ECONOMICS. 


irina.  ^  295 


t^^^'^t 


Let  a&^  in  Fig  I,  represent  the  quantity  of  satisfaction 
obtained  from  the  first  increment  of  food,  and  ac  from 
that  of  clothing.  Then  let  the  diminishing  scale  of  utility 
of  food  follow  the  line  bnij,  where  the  actual  food-supply 
will  be  represented  by  the  line  ae.  At  the  point  e,  where 
no  more  food  will  be  required  for  any  purpose  whatever, 
em  will  be  called  the  marginal  utility.  Let  ch  be  the 
diminishing  line  for  the  clothing  scale  and  the  actual  sup- 
ply represented  by  ah.  The  marginal  utility  in  this  case 
is  gh.  It  is  easy  to  see  in  this  case  that  though  the  first 
increment  of  food  is  much  greater  than  that  of  clothing^ 
yet  the  marginal  utility  of  clothing  is  greater  than  that 
of  food,  on  account  of  the  increased  service  it  performs  to 
humanity.  If  the  line  ch  extends  to  /,  and  ai  represents 
the  actual  supply  of  clothing,  fi  will  represent  the  mar- 
ginal utility  of  clothing.  If  this  is  brought  about  by  an 
increased  desire  for  clothing  relative  to  food,  the  marginal 
utility  of  food  will  rise  from  me  to  nd;  then  the  marginal 
utility  of  food  and  clothing   is   the  same.     When  two 


Ac-Uj 


296 


ECONOMICS. 


articles  are  compared  in  this  way,  each  individual  con- 
stantly estimates  the  want-satisf  jing  power  of  each  article 

demanded. 

Law  of  Demand. 

Each  individual  thus  has  his  demand  schedule  for  every 
article.  Give  an  intelligent  child  a  quarter  and  send  him 
to  a  toy  store  and  he  will  spend  hours  looking  over  various 
articles,  estimating  which  Avill  give  him  the  largest  amount 
of  satisfaction  for  the  money  which  he  has  to  spend;  for 
demand  in  this  case,  as  in  all  other  cases,  represents  the 

V 


p  q 


Fig.  II. 

ability  and  willingness  to  pay  a  given  price  for  any  article 
offered  in  the  market,  and  each  individual  will  take  an 
amount  of  any  given  article  until  the  demand  for  that 
article  is  met  by  a  greater  demand  for  some  other  article. 
In  Fig.  II,  lay  off  on  the  line  AX  the  distances  Am, 


ECONOMICS. 


297 


An,  Ao,  Ap,  Aq,  Ar,  As,  and  At,  respectively  representing 
the  amounts  of  a  given  article  demanded  by  a  single  person 
at  various  prices.  Then  erect  perpendiculars  ma,  nh,  oc, 
pd,  qe,  rf,  sg,  and  th,  representing  prices  corresponding 
respectively  to  the  amounts  demanded.  Then  the  person 
will  take  Am  goods  at  ma  valuation,  An  goods  at  nh  val- 
uation, etc.  If  a  curve  be  passed  through  the  extremity  of 
these  lines  it  will  be  called  a  demand  curve,  which  grad- 
ually approaches  the  line  AX  as  the  want-satisfying  power 
of  the  article  falls,  and  approaches  the  line  AY  as  the 
want-satisfying  power  rises.  If  the  value  of  hats  falls  it 
may  not  aifect  every  one,  but  will  affect  a  few  people  at 
least,  and  the  demand  for  hats  will  increase.  A  fall  in  the 
value  of  sugar  will  have  a  tendency  to  induce  Mr.  A  to 
purchase  more,  a  rise  in  the  value  will  cut  off  his  demand. 
Every  decline  in  valuation  on  the  market  will  be  met 
with  a  larger  sale,  but  the  sale  is  not  necessarily  propor- 
tionate to  this  fall.  There  is  not  an  exact  ratio  between 
a  fall  in  prices  and  an  increased  demand.  A  fall  of  one- 
tenth  in  price  may  increase  the  sales  by  only  one-twentieth, 
or  it  may  increase  them  one-fourth,  or  it  may  even  double 
them. 

The  law  of  increased  demand  may  be  stated  as  follows : 
A  decrease  in  the  supply,  the  demand  remaining  the  same, 
will  cause  the  values  to  rise;  an  increase  in  the  demand, 
the  supply  remaining  constant,  will  cause  values  to  rise; 
an  increase  in  the  demand  with  a  corresponding  increase 
in  the  supply  will  permit  values  to  remain  unchanged;  a 
decrease  in  the  demand,  the  supply  remaining  constant, 
will  cause  prices  to  fall ;  an  increase  in  the  demand  and  a 
decrease  in  the  supply  will  cause  prices  to  rise  rapidly; 


298 


ECONOMICS. 


and  in  every  ease  tlie  demand  and  the  supply  tend  to  seek 

an  equilibrium. 

Market  Demand. 

Other  things  being  equal,  the  single  demand  of  a  person 
is  a  fair  representative  of  the  whole  market.  What  one 
individual  is  doing  in  satisfying  his  wants,  thousands  are 
doing;  and  very  often  they  want  the  same  article  at  the 
same  time.  It  is  hardly  fair  to  say  that  the  average  de- 
mand in  a  given  market  is  the  sum  of  the  individual 
demands,  but  it  is  true  that  the  greater  amount  to  be  sold 
the  smaller  will  be  the  price  at  which  it  will  find  purchas- 
ers ;  and  yet  the  universal  demand  for  an  article  by  many 
people  increases  the  intensity  of  the  desire  and  increases 
its  value. 

Y 


D 

fv 

.0 

V 

\ 

\k 

em  2 

Fig.  III. 


ECONOMICS.  299 

To  generalize  Fig.  II,  we  have  Fig.  Ill,  in  which  we 
let  An  on  the  line  AY  represent  the  demand,  and  Am  on 
the  line  AX  the  supply.  Erect  vertical  lines  from  m  and  n, 
and  where  they  meet  the  point  p  will  represent  the  price 
or  valuation,  for  this  point  will  illustrate  the  place  where 
exchanges  take  place.  Suppose  now  that  Ao  represent  the 
demand  and  the  relative  supply  increased  to  Az  and  p'^ 
the  intersection  of  the  lines  erected  at  o  and  z  respectively, 
will  be  lower  than  p.  Again,  suppose  As  represent  the 
supply,  and  Ae  represent  the  demand,  and  p"  will  be  the 
point  where  exchanges  take  place.  Now  pass  a  curve 
thvongh  p" ,  p' ,  and  jt?,  and  we  have  a  demand  curve,  which 
represents  the  operation  of  every  market  in  which  trans- 
actions take  place. 

Competition  and  Demand. 

Competition  goes  on  in  never-ceasing  activity,  tending 
to  level  the  prices  of  all  commodities  of  a  similar  nature. 
Each  demand  schedule  is  continually  leveled  or  merged 
in  the  general  market  demand.  There  is  also  another 
competition  going  on  in  the  market,  between  articles  of 
a  different  kind.  If  corn  becomes  high,  people  will  use 
wheat,  and  vice  versa.  Thus,  competition  is  observed 
everywhere  among  substitute  articles.  When  we  measure 
men's  desires  and  calculate  the  influence  of  each  demand 
schedule  for  each  separate  article,  we  see  that  this  method 
of  substitution  is  universal,  and  that  the  appearance  in  the 
market  of  any  commodity  which  can  be  used  as  a  substitute 
for  another  already  in  use  will  lower  the  price  of  the  latter. 


300 


ECONOMICS. 


CHAPTEK  II. 
VALUE. 

Definition. 

Value  is  a  relative  term,  which  is  applied  to  different 
articles  to  represent  their  degree  of  desirability.  As  it 
is  the  desire  for  economic  goods  which  makes  them  valua- 
ble, and  as  utility  represents  the  want-satisfying  power 
of  goods,  value  has  been  called  the  measure  of  utility; 
and  in  one  sense  this  is  true,  for  value  always  accompanies 
utility  although  it  is  never  identical  with  it. 

The  various  uses  of  the  term  value  by  economists,  and 
the  popular  conception  of  the  term,  have  led  to  great  con- 
fusion. Even  able  writers  have  been  often  careless  in  its 
use.  It  is  stated  that  at  one  time  the  celebrated  Sydney 
Smith  joined  a  club  for  the  purpose  of  studying  political 
economy.  His  sole  purpose,  as  he  stated,  was  to  find  out 
the  use  and  true  meaning  of  the  word  value;  but  after 
remaining  in  the  club  for  some  time  he  finally  withdrew 
because,  as  he  said,  the  club  knew  no  more  on  the  question 
than  he  did.  Owing  to  the  controversy  on  this  subject, 
it  was  with  a  sigh  of  relief  that  some  economists  welcomed 
the  work  of  Stanley  Jevons,  which  discarded  the  use  of 
the  term  altogether.  In  the  light  of  recent  discussion  it 
seems  very  odd  that  John  Stuart  Mill  should  have  stated 
in  1848  that  there  remained  nothing  for  him  or  any  other 
writer  to  state  concerning  the  laws  of  value.  Since  that 
time  modern  economists  have  accepted  the  loose  usage  of 


ECON'OMICS. 


301 


the  word,  giving  it  their  own  peculiar  meaning.  Recently, 
however,  the  Austrian  economists  have  reopened  the  sub- 
ject, and  given  a  clear  and  satisfactory  analysis  of  value. 
This  discussion  has  given  evidence  of  the  differences  of 
opinion  on  the  subject. 

Differencea  of  Opinion. 

Much  of  the  difficulty  in  modern  discussion  has  arisen 
from  misinterpretations  of  loose  statements  made  by 
Adam  Smith.  In  his  Wealth  of  l^ations  (Bk.  I,  Ch.  IV) 
he  states :  "  The  word  value,  it  is  to  be  observed,  has 
two  meanings,  and  sometimes  expresses  the  utility  of  some 
particular  object  and  sometimes  the  power  of  purchasing 
other  goods  which  the  possession  of  that  object  conveys. 
The  one  may  be  called  value  in  use  and  the  other 
value  in  exchange.  The  things  which  have  the  great- 
est value  in  use  have  frequently  little  or  no  value 
in  exchange;  on  the  contrary,  those  which  have  the 
greatest  value  in  exchange  have  little  or  no  value  in 
use.  Nothing  is  more  useful  than  water;  it  will 
purchase  scarcely  anything,  scarce  anything  can  be 
had  in  exchange  for  it.  A  diamond,  on  the  contrary,  has 
scarce  any  value  in  use,  but  a  very  great  quantity  of 
goods  may  frequently  be  had  in  exchange  for  it.''  While 
it  was  evidently  not  intended  by  the  author  to  divide  all 
values  into  two  great  independent  comprehensive  classes, 
he  intended  to  point  out  two  separate  uses  of  the  term. 
Perhaps  his  greatest  error  is  found  in  his  misconception 
of  the  term  utility.  In  an  economic  sense  a  diamond  is 
very  useful,  because  men  desire  it  and  use  it,  although 
water  may  be  more  beneficial.     Whisky  and  beer  are  use- 


302  ECONOMICS. 

ful,  although  they  may  not  be  beneficial.  Economic  value 
rests  upon  the  use  of  articles,  and  the  use  depends  upon 
their  desirability. 

Free  Goods  and  Economic  Goods. 

A  discrimination  should  be  made  between  economic 
goods  and  what  are  termed  free  goods.  Air  and  light 
are  useful  and  beneficial,  but  they  are  provided  in  such 
great  quantities  and  without  any  effort  on  the  part  of  man 
that  they  are  said  to  have  no  value.  Water  is  sometimes 
classified  in  the  same  category,  but  its  scarcity  and  its  en- 
larged use  in  supplying  cities  and  in  irrigation  have  devel- 
oped in  it  an  economic  quality.  The  only  goods  that  we 
economize  or  about  which  we  have  economic  care  are  those 
which  are  just  sufficient  to  supply  our  wants  or  insufficient 
for  that  purpose;  consequently,  the  free  gifts  of  nature, 
which  are  bestowed  in  such  abundance  as  to  be  in  no  sense 
objects  of  care  to  man,  are  said  to  be  valueless.  Hence 
it  is,  if  no  want  is  created  there  is  naught  to  be  satisfied^, 
and  consequently  there  is  no  utility,  and  if  there  is  no 
utility  there  can  consequently  be  no  value. 

Value  an  Index  of  Utility. 
If  utility  is  the  want-satisfying  power  of  goods,  value 
is  a  sort  of  index,  expressive  of  the  variations  of  utility. 
It  is  the  valuometer  which  measures  the  intensity  of  desire. 
Hence  it  is  that  value  changes  with  utility,  increment  by 
increment,  and  this  value  indicates  the  rise  and  fall  of 
utility.  However,  the  sum  total  of  utility  is  not  equivalent 
to  the  sum  total  of  value,  any  more  than  the  sum  total  of 
the  readings  of  a  thermometer  during  the  day  will  meas- 
ure the  sum  total  of  the  heat  in  a  given  mass  of  water 


ECONOMICS. 


303 


during  the  same  period.  Both  utility  and  value  are  rela- 
tive terms,  and  the  changes  in  utility  are  recorded  by  the 
changes  in  value;  nevertheless,  the  utility  of  the  mass  of 
a  given  good  may  increase  while  the  value  of  the  mass 
may  decline. 


n 


[ 

X 

[^ 

,2 

N 

s 

\t 

[ 

?     c 

;     c 

)   ( 

i     f     a 

X 


Fig.  IV. 

Let  us  illustrate  these. principles  by  Fig.  IV.  Let  the 
base  AX  represent  the  quantity  of  wheat  to  be  had  for 
all  purposes.  Let  the  vertical  line  ^F  be  the  want-satisfy- 
ing power  of  this  mass.  Let  Ah  represent  the  first  incre- 
ment, used  for  sowing  wheat,  he  for  making  bread,  cd  for 
feeding  horses,  de  feeding  cattle,  etc.,  (each  increment 
supposed  to  represent  the  want-satisfying  power.)      Let 


304 


ECONOMICS. 


hx  represent  the  want-satisfying  power  of  the  first  incre- 
ment, cy  of  the  second,  dz  of  the  third,  etc.  If  we  extend 
a  curve  through  the  extremities  of  these  lines  we  shall 
have  a  curve  of  valuation  as  well  as  an  utility  curve,  the 
value  of  each  separate  increment  varying  as  the  utility  of 
each  separate  increment.  The  sum  total  of  the  utility 
will  be  found  by  taking  the  sum  of  the  rectangles  Ax,  hy, 
cz,  etc.  Suppose  now  that  es  represents  the  last  want- 
satisfying  power  of  wheat,  l^o  more  wheat  will  be  pur- 
chased or  be  desired  for  any  purpose  whatever.  This  will 
represent  the  value  of  the  last  increment ;  it  will  also  be 
the  utility  of  the  last  increment:  but  as  the  value  of  the 
mass  is  measured  by  the  value  of  the  last  increment  multi- 
plied by  the  number  of  increments,  the  total  value  will  be 
measured  by  the  rectangle  Aesm,  which  is  much  less  than 
the  figure  AesY.  This  occurs  from  the  fact  that  of  any 
article  in  the  market  the  value  of  the  entire  mass  will  be 
governed  by  the  lowest  valuation  in  the  market. 

Theories  of  the  Cause  of  Value. 

There  are  many  theories  as  to  the  cause  of  value. 
First  are  those  which  teach  that  labor  is  the  cause  of  value, 
and  that  articles  are  valued  in  the  market  according  to  the 
labor  it  has  taken  to  produce  them.  This  theory  was  first 
propounded  by  Ricardo,  and  subsequently  defended  by  Bas- 
tiat  and  Karl  Marx.  It  is  true  that  labor  has  much  to  do 
with  the  increase  or  decrease  in  the  value  of  goods,  but 
it  cannot  be  taken  as  the  primary  origin  of  value.  If  this 
were  true,  that  the  value  of  an  object  is  determined  by  the 
labor  spent  in  its  production,  then  it  would  follow  that 
value  would  be  unchangeable;  on  the  contrary,  we  see 


ECONOMICS. 


305 


that  the  values  of  articles  constantly  change.  Machines 
and  implements  that  cost  excessive  and  long-continued 
labor  are  finally  rendered  valueless  because  they  are  no 
longer  desired  for  service.  The  same  idea  is  expressed  in 
the  exchange  of  articles  in  the  market  at  the  same  price, 
which  cost  different  amounts  of  labor.  If  labor  were  the 
cause  of  value,  articles  that  cost  the  same  amount  of 
labor  would  exchange  equally;  and  again,  if  labor  were 
the  cause  of  value,  there  would  be  no  value  without 
labor, — ^yet  things  which  are  of  great  value  are  found  or 
discovered  without  any  particular  labor.  But  labor  itself 
is  valuable,  and  we  could  not  estimate  it  if  it  were  the  sole 
cause  of  value  in  other  things.  It  is  evident  that  this 
theory,  formerly  accepted,  is  untenable. 

Another  theory  is  called  "the  diffioulty-of -attainment 
theory."  But  it  presents  a  condition  of  value,  and  not 
a  cause.  It  hinders  us  from  placing  desirable  goods  upon 
the  market,  and  thus  makes  a  scarcity  in  the  market  and 
the  value  of  the  articles  rises;  that  is,  the  demand  re- 
maining the  same,  the  supply  becomes  deficient  and  values 
rise.  But  suppose  no  person  wanted  these  goods,  however 
difficult  of  attainment,  they  would  be  of  no  value. 

Closely  allied  to  this  is  the  scarcity  theory.  It  simply 
asserts  that  because  these  goods  which  are  furnished  us 
gratuitously  and  in  abundance  without  labor  have  no  value, 
other  goods  are  valuable  because  they  are  scarce.  It  is  true 
that  if  desirable  goods  become  scarce  their  value  will  be 
enhanced,  but  scarcity  may  not  be  called  the  primary  cause 
of  value.  Frequently  there  are  goods  in  the  market,  very 
scarce,  but  no  one  wants  them  and  they  have  no  value. 

—20 


306  ECONOMICS. 

utility  the  Cause  of  Value. 

The  last  group  of  theories  to  be  mentioned  is  that  of 
those  who  say  that  utility  is  the  cause  of  value.  Taking 
utility  in  the  sense  of  satisfying  wants,  this  is  a  correct 
theory,  for  it  is  the  want-satisfying  power  of  goods  which 
makes  them  valuable.  This  want-satisfying  power  and  the 
demand  remaining  constant,  goods  will  increase  or  decrease 
in  value  in  accordance  with  their  difficulty  of  attainment, 
just  as  they  are  scarce  or  plentiful  in  the  market.  As  we 
desire  goods  very  keenly  their  value  rises,  and  our  desire 
is  greatly  increased  if  we  find  them  insufficient  for  our 
wants;  their  quantity,  moreover,  is  more  or  less  insuffi- 
cient in  accordance  with  the  ease  or  difficulty  with  which 
they  are  multiplied. 

Objective  and  Subjective  Value. 
It  is  convenient  to  classify  value  into  objective  and  sub- 
jective, for  a  better  understanding  of  its  nature.  When 
we  consider  personal  well-being,  value  is  considered  to 
be  subjective;  but  when  we  consider  some  technical  or 
•mechanical  result  without  any  immediate  reference  to 
personal  well-being,  then  we  have  objective  value.  The 
latter  may  again  be  divided  into  two  divisions, — the  first 
represented  by  the  amount  of  potential  energy  in  material 
goods^  and  the  second  in  the  power  of  exchange.  These 
represent  the  relation  of  potential  energy  and  relative 
capacity  between  different  articles.  To  illustrate,  let  us 
take  the  subject  of  coal.  The  subjective  value  of  coal 
is  determined  by  the  amount  of  satisfaction  I  get  in 
warming  myself  before  the  fire.  The  objective  value  of 
coal  will  be  the  amount  of  power  it  creates  through  its 


ECONOMICS. 


307 


heating  capacity;  and  in  the  other  objective  sense,  the 
amount  of  economic  goods  it  will  exchange  for  in  the 
market.  In  economics  we  have  nothing  to  do  with  the 
first  two  divisions  of  objective  value.  We  may  not  con- 
sider the  heating  capacity  of  coal,  the  resisting  power  of 
different  kinds  of  wood,  the  feeding  power  of  corn,  nor 
the  life-giving  power  of  sunshine;  we  have  to  do  with 
but  one  objective  phase  of  value,  and  that  is  exchange 
value.  The  power — or  capacity,  if  we  may  say  this — of 
objects  in  exchange,  is  economic  value. 

It  will  be  observed,  however,  that  this  phase  of  objective 
value  rests  upon  personal  or  subjective  value.  In  other 
words,  exchange  value  rests  upon  men's  desire  for  goods 
and  their  personal  estimates  of  what  goods  are  worth  in 
the  market.  Thus  will  value,  which  represents  power  or 
capacity  in  exchange,  rest  upon  man's  attempt  to  satisfy 
wants.  Wherever  there  is  a  want  to  satisfy,  there  value 
arises.  If  a  surplus  occurs  so  that  want  is  impossible,  or 
if  desire  ceases  on  account  of  satiety,  value  declines  and 
tends  to  pass  out  of  existence.  But  wherever  a  want 
exists, — a  lack  of  something, — there  is  an  accompanying 
desire  to  find  the  thing  needful.  Therefore,  both  utility 
and  value  rest  upon  the  basis  of  the  wants  of  man.  The 
degree  to  which  wants  are  felt  depends  upon  the  extent 
of  the  supply  needed  before  the  point  of  satiety  is  reached, 
and  also  upon  the  common  supply  in  relation  to  the  need; 
consequently  we  must  come  to  measure  all  wants  relatively 
by  the  laws  of  supply  and  demand.  By  the  demand  for  an 
object  is  meant  the  desire  for  it,  accompanied  by  the  will- 
ingness and  ability  to  pay  for  it  in  goods,  services,  or 
money. 


308 


ECONOMICS. 


Intrinsic  Value. 

The  tendency  in  people  to  insist  that  the  physical 
qualities  of  an  object  determine  its  value,  turns  the  whole 
matter  into  objective  relations,  as  there  is  a  tendency  to 
believe  that  objects  carry  with  them  some  inherent  quality 
that  makes  them  valuable.  So  far  as  they  satisfy  the 
wants  of  man  this  is  true,  for  it  is  the  quality  of  goods 
that  makes  them  desirable,  and  by  quality  we  mean  their 
capacity  for  service  or  pleasure,  and  this  makes  them  de- 
sirable and  hence  valuable.  The  so-called  intrinsic  value 
of  an  article  means  nothing  more  than  its  capacity  to 
satisfy  desires.  The  intrinsic  value  of  a  hat  is  simply 
hat-service  or  hat-satisfaction ;  intrinsic  value  of  money  is 
its  exchange  value;  intrinsic  value  of  a  gold  watch  is  its 
service  and  beauty.  The  term  is  more  frequently  used 
in  respect  to  money  than  in  any  other  way.  Thus,  gold 
and  silver  are  said  to  have  intrinsic  value.  For  the  pur- 
pose of  exchange,  the  desire  for  a  gold  dollar  is  just  the 
same  as  the  desire  for  a  paper  dollar,  for  the  two  will 
perform  the  same  service, — no  more,  no  less.  Hence  it  is 
that  the  intrinsic  value  of  an  article  must  rest  upon  de- 
sire alone,  and  that  simply  means  that  it  is  subjective. 

'Now  the  real  point  at  issue  is  that  gold  can  be  used  for 
some  other  purpose  than  that  of  mere  exchange.  Its 
market  is  large  and  its  demand  is  constant  for  a  thousand 
purposes,  while  the  paper  dollar  can  be  used  for  only 
one  purpose,  or  possibly  two,  because  the  paper  might  be 
used  in  the  manufacture  of  other  paper;  hence  the  in- 
trinsic value  of  paper  money  is  nothing,  or  very  small, 
while  the  intrinsic  value  of  gold,  being  universally  desira- 
ble, is  very  large.     We  reach  the  conclusion,  then,  that 


ECONOMICS.  309 

all  values  in  the  ultimate  must  be  traced  to  the  subjective 
conditions.  Primarily,  gold,  silver,  lead,  copper,  iron, 
tin,  will  be  valued  according  to  their  service  and  satisfac- 
tion, and  of  course  their  service  and  satisfaction  will  de- 
pend, secondarily,  upon  the  qualities  which  they  possess. 

References:  Smart,  William,  Introduction  to  the  Theory  of 
Value ;  Marshall,  Principles  of  Economics ;  Commons,  Distribu- 
tion ;  Ely,  Outlines  of  Economics ;  Wieser,  Fred  von,  Natural  Value; 
Seligman,  Principles  of  Economics. 


310  ECOiq^OMICS. 


CHAPTER  III. 

PRICE. 

Definition. 
Price  is  the  value  of  an  article  measured  in  the  terms 
of  money.  As  all  commodities  are  measured  in  terms  of 
one  called  money,  a  general  rise  in  prices  is  indicated  by 
a  general  fall  in  the  value  of  the  measuring  unit.  As  all 
values  are  relative,  there  could  not  be  a  general  rise  or 
general  fall  of  values,  for  if  articles  a,  6,  and  c  have  their 
values  represented  by  10,  20,  and  30,  it  means  that  their 
ratios  of  value  are  1,  2,  and  3.  If  now  the  value  of  each 
is  doubled  they  will  become  20,  40,  and  60,  or  if  it  is 
reduced  to  50  per  cent,  they  will  be  5,  10,  and  15.  In 
each  case  the  ratio  of  1,  2,  and  3  remains.  There  may  be 
a  rise  or  fall  in  the  price  of  one  or  more  articles  in  rela- 
tion to  other  articles  without  any  necessary  change  in  the 
money  value,  but  when  all  prices  go  up  or  down  it  is  an 
indication  that  the  values  of  the  articles  of  the  group  have 
changed  their  relation  to  the  measuring  unit  called  money. 

Manner  in  which  Market  Price  is  Established. 
We  have  already  noted,  in  Chapters  I  and  II,  the  nature 
of  subjective  value  and  the  individual-demaiif  schedule. 
The  marginal  demand  and  the  marginal  utility  are  now 
understood,  and  the  relation  of  marginal  utility  to  value 
and  price  have  been  theoretically  explained.  It  now  re- 
mains to  be  determined  how,  from  a  practical  standpoint, 


ECOITOMICS.  311 

prices  are  established.  Remembering  that  the  law  of 
supply  and  demand  indicates  an  equilibrium,  and  that 
in  individual  cases  the  demand  decreases  with  the  lowering 
of  the  marginal  utility,  let  us  enter  an  ideal  market,  and 
by  illustrations  see  what  actually  takes  place  between  indi- 
viduals. 

Suppose  A  wishes  to  sell  a  horse,  the  only  one  of  its  kind 
in  the  market,  and  B  is  the  only  purchaser.  Suppose  A's 
minimum  price  is  $30  and  B's  maximum  is  $25.  If  the 
two  parties  hold  to  this  there  will  be  no  sale;  A  would 
be  willing  to  take  $30  for  the  horse,  but  no  less ;  B  would 
be  willing  to  pay  $25  for  the  horse,  but  no  more.  There 
are  other  ways  in  which  he  would  rather  invest  his  money 
rather  than  pay  a  dollar  more  than  $25 ;  A  knows  no  other 
way  more  to  successfully  invest  his  money  than  at  the 
price,  $30. 

Second  proposition:  Suppose  A's  minimum  price  is 
$30  and  B's  maximum  price  is  $40.  That  is,  rather  than 
not  get  the  horse,  B  would  pay  $40 ;  rather  than  not  sell^ 
A  would  take  $30.  At  first  each  man's  proposition  is  un- 
known to  the  other.  A  desires  to  get  all  he  can  for  the 
horse ;  B  wishes  to  purchase  it  at  the  smallest  price  possi- 
ble. There  will  be  a  sale,  the  price  being  fixed  between  $30 
and  $40,  according  to  the  skill  of  buyer  or  seller.  This  is 
a  simple  illustration  of  what  is  known  as  "the  haggling 
of  the  market."  As  a  third  case,  suppose  A's  minimum 
price  is  $30  and  B's  maximum  price  is  $30;  there  will 
probably  be  a  sale  at  that  figure.  It  may  happen  that  such 
a  case  actually  occurs. 

Again,  suppose  ihere  are  three  purchasers  of  horses, 


312 


ECONOMICS. 


willing  to  give  $30,  $35,  and  $40,  respectively,  for  the 
horse,  and  there  is  only  one  horse  of  the  kind  in  the 
market.  Then  A,  B  and  C  bid  for  the  horse.  It  is  a 
case  of  cbmpetition  in  buying,  but  not  a  competition  in 
selling.  A  ceases  to  bid  above  $30,  B  ceases  to  bid  above 
$35,  and  the  difference  is  settled  between  C  and  the  seller. 
If  C  is  a  shrewd  buyer  he  will  not  pay  much  over  $35, 
because  he  has  discerned  that  the  seller  would  be  willing 
to  take  $30  rather  than  not  sell. 

Suppose  now  there  are  three  horses  in  the  market  and 
three  purchasers,  and  that  A  will  sell  at  $30  mimimum, 
B  at  $35  minimum,  C  at  $40  minimum.  D  will  pay  $35 
maximum,  E  $35  maximum,  and  F  $40.  'Now  if  the 
three  horses  are  similar  and  are  sold  in  the  open  market, 
a  fair  price  will  be  fixed  for  the  horses.  F  does  not  pro- 
pose to  pay  more  than  E  or  D.  And  D  expects  to  pay  as 
much  as  either  E  or  E.  The  sale  takes  place.  The  price 
of  the  horses  will  be  fixed  between  $30  and  $40,  and  as  D 
and  E  offer  each  $35,  and  there  is  one  horse  offered  at  this 
price  and  one  at  less,  the  majority  of  buyers  and  sellers 
would  indicate  a  price  at  $35  whether  the  horse  is  sold 
or  not. 

This  is  an  elementary  case  of  buyers  and  sellers.  If  we 
enlarge  this  market,  and  have  many  buyers  and  many 
sellers,  we  shall  have  universal  competition  in  buying  and 
selling  in  the  open  market;  and  it  is  by  this  method  that 
prices  are  finally  fixed.  Where  a  series  of  buyers  and  a 
series  of  sellers  are  competing,  exchanges  will  take  place 
where  each  individual  sees  a  gain.  Every  individual  will 
prefer  a  greater  gain  to  a  less,  and  the  price  is  established 
somewhere  between  the  minimum  of  the  seller's  subjective 


ECONOMICS. 


S13 


valuation  and  tlie  buyer's  maximum  valuation,  or  between 
the  subjective  valuation  of  the  first  of  the  successful  and 
the  first  unsuccessful  buyers  where  only  competition  takes 
place  •  or,  in  competition  of  many  buyers  and  sellers,  be- 
tween the  subjective  valuations  of  the  last  buyer  and  the 
last  seller.     In  this  manner  a  market  price  is  established 

for  all  bidders. 

Market  Interferences. 

In  any  market  the  supply  of  a  given  article  is  the  amount 
offered  at  a  given  price,  and  it  is  different  from  the  stock 
of  the  article  on  hand.  Th,is  discrimination  must  be 
kept  carefully  in  mind.  The  supply  of  an  article  always 
decreases  with  a  decrease  in  price  and  increases  with  an 
increase  in  price.  I^ow  a  market  is  a  place  where  prices 
are  determined  by  competition,  and  the  market  demand 
for  an  article  is  the  amount  that  will  be  taken  at  any  given 
price.  It  diminishes  as  the  price  increases.  It  is  differ- 
ent from  mere  desire.  It  represents  the  willingness  and 
ability  to  take  a  certain  quantity  of  a  given  article  at 
a  given  price.  A  monopoly  destroys  the  market,  and  prin- 
ciples laid  down  for  the  establishment  of  a  market  price 
can  prevail  only  under  free  competition.  Under  our  mod- 
ern system  of  competitive  trading,  the  price  at  which  the 
demand  is  equal  to  the  supply  will  be  the  market  price 
of  the  article. 

Take,  for  instance,  the  example  of  cotton.  Suppose  it 
be  selling  at  eight  cents  in  the  l^ew  York  market.  So  long 
as  the  demand  equals  the  supply,  the  price  will  remain 
at  eight  cents.  If  a  large  stock  is  thrown  upon  the  market 
the  sellers  will  begin  to  fear  that  they  cannot  dispose  of 
their  stock,  and  will  offer  to  sell  for  less.     The  buyers, 


314 


ECONOMICS. 


observing  this,  each  strives  to  obtain  it  at  a  lower  price, 
and  so  two  groups  of  people  strive  to  fix  on  the  market 
rate, — the  bulls  and  the  bears.  In  the  Berlin  Stock  Ex- 
change the  equalizing  of  the  supply  and  demand  and  the 
fixing  of  a  market  rate  is  left  to  a  commission.  The 
committee  settles  upon  the  price  which  will  secure  the 
maximum  number  of  transactions.  In  an  ordinary  market 
thiff  settled  price  is  fixed  by  the  self-interest  of  groups  of 

D 


60000 


40000 
35  GOO 
30000 
25000 


^ 


^: 


4        S        6         7 
Figure  F. 


10 


buyers  and  sellers  acting  under  free  competition  and  in- 
dependently. There  are  interferences  in  the  establish- 
ment of  this  market  through  corners  of  market  valuations, 
and  through  custom  by  which  prices  are  sometimes  fixed 
for  a  long  period  of  time,  and  finally  through  combinations 
of  buyers  and  sellers  in  fixing  the  price. 


ECONOMICS. 


315 


Keferring  again  to  the  market  of  copper  for  a  single 
day  in  ^N'ew  York  city,  let  us  suppose  in  Figure  Y  that  on 
the  line  AX  we  have  1,  2,  3,  4,  5,  6,  7,  8,  9,  10,  as  repre- 
senting prices  of  copper  demanded  in  quantities  ranging 
from  102;,  dy,  Sx,  7w,  6u,  hv,  etc.  !N'ow  since  the  quantity 
tends  to  increase  as  the  price  decreases  and  diminish  as 
the  price  increases,  if  lOx  equals  25,000  pounds  we  shall 
find  there  will  be  demanded  that  amount  at  10  cents,  30,000 
at  nine  cents,  35,000  at  eight  cents,  40,000  at  seven  cents, 
and  60,000  at  six  cents. 
Y 


D 

.X 

1  ^' 

\^  X' 

„ 

r^  y       y       y"  ^^' 

Figure  VI. 

Generalizing  this  as  in  Figure  YI,  at  a  price  Ay'  there 
will  be  demanded  y'x',  and  at  the  price  Ay  there  will  be 
demanded  yx  pounds,  and  the  price  Ay"  there  will  be  de- 
manded y"x"  pounds.  If  a  curve  DD  be  passed  through 
X,  x',  and  x",we  shall  have  represented  the  demand  curve, 
illustrating  the  rise  and  fall  of  prices  and  the  amount  of 


316 


ECONOMICS. 


goods  demanded  at  the  different  prices.  Probably  the 
whole  stock  in  the  market  will  be  offered  at  ten  cents  if 
there  are  not  sufficient  purchasers.  At  nine  cents  a  little 
will  be  withheld  from  the  market,  more  at  eight  cents, 
still  more  at  six.  If  90,000  pounds  be  the  stock,  only  a 
part  will  be  thrown  upon  the  market  in  a  single  day. 


4       5        6        7 
Figure  VII. 


10 


Laws  of  Supply. 
JsTow  suppose  in  Fig.  VII  we  let  1,  2,  3,  4,  5,  6,  7,  8,  9^ 
10,  on  the  line  AX  represent  the  respective  prices  at 
which  copper  is  offered  in  the  market.  Suppose  there  are 
15,000  pounds  offered  at  six  cents,  25,000  at  seven  cents, 
and  35,000  at  eight.  Then  we  shall  find  that  as  the  price 
increases  from  six  to  seven  the  amount  offered  will  increase 
from  15,000  to  25,000  pounds,  and  as  the  price  increases 


ECONOMICS. 


317 


to  eight  the  amount  offered  will  be  35,000  pounds;  but  if 
the  amount  demanded  at  eight  cents  is  35,000,  the  de- 
mand curve  will  also  pass  through  the  point  p.  At  this 
point  the  market  value  will  be  fixed  and  35,000  will  be 
offered  at  eight  cents  and  the  remainder  will  be  held  for 
a  rise  in  price;  that  is,  the  point  of  intersection  of  the 
demand  curve  and  the  supply  curve  will  be  the  point  of 


y        y        y  ^ 

Figure  VIII. 

the  market  price.  In  the  case  of  perishable  goods  the 
supply  curve  will  be  represented  by  a  straight  line,  as 
the  whole  amount  must  be  offered  in  a  given  time,  regard- 
less of  price.  Generalizing,  we  have  the  law  illustrated  in 
Fig.  VIII,  the  point  of  intersection  of  the  supply  curve 
88  with  the  demand  curve  DD  at  x's'  represents  the  point 
of  market  price  and  Ay'  will  represent  the  market  price. 


818 


ECONOMICS. 


Normal  Price. 

The  normal  price  of  articles  tends  to  approximate  the 
cost  of  production.  Through  competition,  prices  of  staple 
commodities  are  proportionate  to  the  cost  of  producing 
them.  If  the  market  price  of  an  article  is  not  sufficient  to 
pay  the  cost  of  making,  attention  will  be  turned  to  other 
products,  such  as  copper,  lead,  gold,  silver,  wheat,  corn,  etc. 
There  is  always  a  tendency,  on  the  other  hand,  for  high 
prices  to  be  forced  down  by  withdrawal  of  demand  from 
high-priced  articles  wherever  substitutes  can  be  obtained. 
While  temporary  market  prices  are  determined  by  traders, 
the  fundamental  basis  of  prices  will  be  found  in  manufac- 
turers, and  we  shall  always  find  then  two  market  centers, — 
the  one  the  retail  and  the  other  the  wholesale. 

The  manner  in  which  the  normal  price  is  established  is 
through  an  equalizing  process  based  partially  upon  the 
cost  of  production  and  on  supply  and  demand,  and  the 
transition  from  normal  price  to  market  price  is  generally 
a  very  clumsy  process.  In  the  first  place,  it  is  difficult  to 
determine  the  cost  of  production  in  any  given  line,  for 
the  expense  varies  and  it  is  a  question  whether  the  aver- 
age expense,  the  maximum  expense,  or  the  minimum  ex- 
pense should  be  noted.  If  there  are  several  establishments 
producing  the  same  line  of  goods,  some  of  which  are  more 
favorably  located  than  others,  those  more  favorably  located 
will  be  able  to  produce  goods  at  a  cheaper  rate,  and  when 
the  demand  is  limited,  so  that  the  more  favorably  located 
institutions  produce  all  the  goods  necessary,  these  richer 
establishments  will  set  the  normal  price;  but  when  these 
more  favorably  located  establishments  are  not  able  to  fur- 
nish the  entire  output,  the  price  will  be  set  by  the  least 


ECONOMICS. 


319 


favorably  located  in  the  entire  number.  Perhaps  the 
average  expense  will  be  estimated  by  taking,  year  in  and 
year  out,  the  entire  product  and  averaging  the  price 
throughout  the  given  period. 

At  best,  the  relations  between  cost  and  price  are  ob- 
scure, on  account  of  by-products.  Thus,  in  the  production 
of  cotton  we  have  cotton  seed,  which  goes  a  long  way 
toward  the  cost  of  production  of  the  cotton;  and  in  some 


instances  coke,  which  is  obtained  in  the  manufacture  of 
gas,  receives  such  a  favorable  market  as  to  greatly  reduce 
the  cost  of  the  gas.  There  is  a  steadiness,  however,  to  all 
manufacturing  industries,  hence  there  is  a  slowness  of 
investment.  It  Is  not  easy  to  shift  investment  of  property 
from  one  place  to  another,  hence  the  process  of  change  of 
investment  is  very  slow.  Manufacturing  industries  may 
enjoy   a   monopoly   for   many  years   before   competitors 


320 


ECONOMICS. 


discover  the  real  marginal  profits.  Railroads  may  en- 
joy monopolies  for  years  though  threatened  with  compe- 
tition. I^evertheless,  with  all  interferences,  there  is  a 
tendency  in  all  prices  to  become  normal  in  spite  of  legis- 
lation or  combination,  and  where  we  have  normal  prices 
the  amounts  of  production  and  consumption  tend  to  equal- 
ize each  other. 

In  Fig.  IX,*  let  Ay  on  AX  be  the  normal  price,  and  yx 
the  quantity  which  will  be  ordinarily  produced  and  con- 
sumed at  that  price.  There  will  be  no  permanent  demand 
above  this.  Then  let  Ay'  represent  the  minimum  cost  of 
production  of  the  most  advantageously  situated  producer. 
All  permanent  supply  ceases  below  this.  The  total  de- 
mand or  price  will  extend  from  Ay''  to  Ay.  The  total  sup- 
ply or  cost  from  Ay  to  Ay'.  At  the  point  where  the  pro- 
duction and  consumption  equalize  each  other,  viz.,  at  the 
point  2/,  the  normal  price  will  be  determined. 

Limitation  of  Prices. 
In  some  instances  prices  are  limited  by  law,  as  in  the 
case  of  the  legal  rates  of  gas  established  in  Massachusetts, 
New  York,  and  Maryland.  By  act  of  the  legislatures  of 
'New  York  and  Maryland,  gas  will  not  cost  over  $1.25  per 
thousand  cubic  feet.  Monopoly  cannot  extend  beyond  this 
price.  In  former  times  it  was  an  object  of  great  contro- 
versy to  determine  what  was  a  just  price  or  a  fair  price. 
Many  attempts  have  been  made  to  limit  prices  by  law,  most 
of  which  have  f  ail-ed.  The  attempts  to  establish  maximum 
freight  rates  have  proved  to  a  certain  extent  failures 
where  they  have  tried  to  make  these  rates  fixed.  Where 
they  have  been  placed  in  the  hands  of  commissions,  with 

*  See  Hadley,  p.  90. 


ECONOMICS. 


321 


the  mandate  of  the  law  insisting  only  on  reasonable  rates 
being  charged,  something  has  been  accomplished  to  regu- 
late these  rates.  In  many  instances  medical  fees  are  lim- 
ited by  custom. 


Y 


^  F  F'  H  ^ 

Figure  X. 

Cost  of  Production,  and  Normal  Price. 
In  Fig.  X,*  let  AX  equal  the  production  of  an  indefi- 
nite quantity  of  some  commodity  of  increasing  returns, 
then  BZ  a  line  of  diminishing  cost  per  unit  of  the  product. 
Let  AC  represent  the  greatest  utility  of  the  product,  and 
CY  the  line  of  diminishing  utility.  ISTow  if  the  product 
should  exceed  AH,  the  value  of  the  marginal  product  will 
be  less  than  the  cost  of  producing  the  same.  That  is,  the 
value  of  the  product  will  be  A  VDH,  while  the  cost  will  be 
ABDH,  and  the  cost  will  be  greater  than  the  value  of  the 
product  by  the  triangle  BVD.     ISTow  let  us  limit  the  pro- 

*  See  Commons,  p.  125. 
—21 


322  ECONOMICS. 

duction  to  the  point  F,  then  the  value  of  the  product  will 
be  AFEB,  and  the  cost  will  be  AFKB.  The  profit  will  be 
BKE,  Again,  if  the  limit  of  the  point  of  production  be  at 
F\  then  the  value  of  the  product  will  be  AF'E'B',  and  the 
cost  will  be  AF'K'B'.  As  the  two  triangles  BOB'  and 
K'OE'  are  just  equal,  the  cost  in  this  case  just  equals 
the  value  of  the  product. 

References:  Oommons,  Distribution  of  "Wealth;  McFarlane, 
Value,  Price,  and  Distribution;  Hadley,  Economics;  Mill,  Princi- 
ples. 


ECONOMICS. 


323 


CHAPTER  IV. 

MONEY. 

Beginnings  of  Exchange. 

When  the  division  of  labor  came  about,  and  each  indi- 
vidual sought  to  perform  certain  services  for  himself  which 
he  could  do  better  than  others,  he  accumulated  a  surplus 
of  goods  which  he  exchanged  for  others.  That  is,  when 
he  had  more  of  a  certain  line  of  goods  than  he  actually 
needed,  he  exchanged  the  "relatively  superfluous  for  the 
relatively  necessary."  In  this  exchange  he  disposed  of 
those  goods  of  which  he  had  an  abundance  for  those  of 
which  he  had  a  deficiency.    In  this  way  barter  sprang  up. 

Early  History  of  Money. 

Money  was  not  devised  by  the  thoughtfulness  of  any  one 
brain,  but  came  into  being  simply  by  use.  The  practices 
of  nations  in  primitive  times,  as  well  as  in  present  times, 
reveal  more  clearly  to  us  the  nature  of  money;  and  the 
presentation  of  facts  concerning  these  tends  to  show  us 
how  far  our  theories  are  correct  and  to  be  depended  upon. 

Money  came  into  use  through  the  economic  process  of 
exchange.  At  first,  one  man  produced  all  that  he  used,  and 
exchanged  nothing  with  his  neighbor ;  there  was,  of  course, 
no  need  of  money.  But  as  time  passed  on  and  he  traded 
his  surplus  products  for  those  surplus  products  of  others, 
he  entered  into  the  field  of  barter.  But,  as  exchange  ex- 
tended and  grew  more  complex,  there  came  to  be  a  certain 


324 


ECONOMICS. 


commodity  which,  measured  the  value  of  all  other  com- 
modities, and  this  we  call  money.  This  development  of 
exchange  led  to  the  use  of  different  kinds  of  money.  First, 
it  might  have  been  ornaments  used  as  money.  Finally, 
the  metals  were  used;  first  the  low-grade  metals  and  then 
the  high-grade  metals. 

The  development  of  exchange  led  to  the  use  of  more  and 
more  valuable  metals,  and  more  and  more  valuable  things 
to  exchange.  The  accumulation  of  wealth  led  to  the  use  of 
a  higher  and  more  valuable  medium  of  exchange,  the 
standard  of  measuring  value. 

Thus  it  is  that  money  in  its  different  characters  and 
capacities  is,  in  one  sense,  an  index  of  civilization.  In  a 
low  grade  of  civilization,  where  the  standard  of  living  is 
low,  where  the  accumulation  of  wealth  is  not  great,  we 
find  a  medium  of  exchange  of  very  little  value.  Conse- 
quently the  lower  and  baser  metals,  such  as  iron  and 
copper,  or  such  ornaments  as  shells  and  beads,  could  be 
used  as  money  among  savage  tribes.  Iron,  copper,  bronze, 
tin,  and  silver,  each  one  in  its  turn,  has  been  the  chief 
medium  of  exchange  of  tribes  and  nations.  But  prior 
to  the  use  of  money,  barter  represents  the  earliest  form 
of  exchange. 

Barter  is  the  exchange  of  commodity  for  commodity. 
Exchange  itself  has  been  called  by  Mr.  Jevons,  "the  bar- 
ter of  the  comparatively  superfluous  for  the  comparatively 
necessary";  meaning,  of  course,  that  one  man  will  trade 
those  things  in  his  possession  which  he  least  desires  for 
those  things  in  the  possession  of  others  which  he  desires 
more,  and  which  the  others  desire  less.  Consequently 
both  parties  are  benefitted  by  the  barter. 


ECONOMICS. 


325 


Barter  may  take  on  several  different  forms:  as,  the 
exchange  of  commodity  for  commodities — the  trade  of 
potatoes  for  sugar;  second,  the  exchange  of  commodities 
for  services — a  day's  labor  for  a  sack  of  flour;  third,  the 
exchange  of  services  for  services — ^you  work  for  me  while  T 
harvest  my  crop,  and  I'll  work  for  you  while  you  harvest 
yours.  Such  are  the  formulas  for  barter.  To  a  certain 
extent  we  find  remnants  of  these  ancient  forms,  and  they 
tell  us  of  the  day  when  there  were  no  other  methods  of 
exchange  than  these. 

There  are  indeed  many  difiiculties  and  inconveniences  in 
barter,  and  the  chief  difficulty  of  it  is  that  there  must  be 
valuation  of  the  bartered  article  in  terms  of  every  other 
article  in  the  market.  So  that  for  the  exchange  of  100 
articles  there  may  be  4,590  separate  measures  of  value. 
Thus,  the  hat  must  be  measured  in  terms  of  the  coat, 
and  the  coat  in  terms  of  potatoes  and  corn  and  flour,  and 
so  on.  Another  instance  of  the  difficulty  of  barter  is  the 
indivisibility  of  articles.  A  tailor  has  a  coat  which  he 
has  made,  with  which  he  desires  to  buy  groceries  and 
hardware;  doubtless  he  gets  the  articles  which  he  needs 
from  several  different  persons,  but  the  coat  cannot  be  well 
divided ;  consequently  he  cannot  trade  with  several  differ- 
ent persons  until  he  can  find  some  opportunity  for  ex- 
change. 

So,  also,  of  the  payment  for  services :  the  person  who 
works  a  day  or  a  week  or  a  month  must  be  able  to  obtain 
in  pay  the  articles  which  he  desires,  but  as  soon  as  he  gets 
them  he  must  look  around  for  some  one  to  take  them  in 
exchange  for  those  goods  which  he  wishes.  And  again,  it 
is  a  cumbersome  method  of  exchange;  a  process  which 


326  ECONOMICS. 

would  apply  to  a  slowly  moving  community,  a  slowly  de- 
veloping civilization ;  a  people  in  whom  is  found  no  prog- 
ress ;  and  that  is  one  reason  why  the  kind  or  class  of  coin 
used  represents  the  rapidity  of  progress  of  a  nation. 

I  have  stated  that  the  complexity  of  trade  leads  to 
the  primitive  use  of  money.  Thus,  primitive  money  was 
generally  some  well-known  commodity,  something  that 
was  universally  produced  and  universally  admired  within 
the  limits  of  the  tribe  or  tribes  among  which  it  circulated. 
Worthless  things  are  not  usually  chosen  as  money.  In  the 
natural  history  of  its  development,  doubtless  in  very  early 
times,  things  that  we  might  call  worthless,  such  as  the 
articles  of  personal  adornment,  were  used  as  money;  but 
they  satisfied  human  desire,  and  that  is  what  makes  things 
valuable.  Value  rests  not  on  the  thing  itself,  but  in  its 
capacity  to  satisfy  human  wants.  Value  is  more  subjective 
than  objective.  Thus  in  the  hunter-fisher  stage  we  find 
peltry  and  other  productions  of  the  chase  were  used  as 
money.  In  this  rude  state  of  civilization  the  products 
of  the  chase  would  be  the  natural  measures  of  value,  on 
account  of  their  permanent  value  caused  by  their  universal 
desirability  as  clothing.  Hence  the  skins  of  animals  be- 
came one  of  the  earliest  forms  of  currency.  Not  only  the 
Oriental  nations,  but  the  northern  nations  of  Europe,  as 
well  as  the  American  Indians,  have  used  the  skins  and  furs 
of  animals  as  rude  currency.  In  this  respect  the  early  his- 
tory of  the  Hudson  Bay  Company  with  the  ISTorth- Ameri- 
can Indians  is  exceedingly  interesting.  The  different  furs 
or  skins  of  animals  were  represented  at  different  prices^ 
and  they  bought  flour  with  the  beaver-skin  and  the  marten- 
skin.     One  beaver-skin  was  supposed  to  be  worth  two  shil- 


ECONOMICS. 


827 


lings  and  it  represented  two  martens,  and  so  on ;  and  these 
skins  were  exchanged  for  clothing  and  food  according  to 
their  real  value. 

If  we  advance  one  step  higher  in  civilization  and  come 
to  the  currency  of  the  pastoral  age,  we  shall  find  that 
sheep  and  cattle  formed  the  chief  money  of  the  peoples. 
Even  among  the  ancient  Greeks  we  find  the  payment  in 
oxen  rather  than  in  coin. 

Our  word  ^^fee"  has  an  interesting  history:  it  comes 
from  the  Anglo-Saxon  "  feoh,"  which  means  both  money 
and  cattle,  or  a  kind  of  treasure,  so  that  the  cattle 
were  in  this  period  the  medium  of  exchange.  Likewise, 
slaves  were  used  in  the  same  period,  exchanged  for  goods, 
and  bought  and  sold  as  a  measure  of  value.  In  both  of 
these  periods  we  find  the  articles  of  adornment  being  used 
for  money ;  shells  and  beads  and  trinkets  which  were  con- 
sidered valuable  and  which  were  universally  known  were 
among  the  media  of  exchange.  There  was  a  particular 
sort  of  beads  made  of  the  ends  of  black  and  white  shells 
rubbed  down  and  polished,  and  these  were  called  wampum. 
This  was  so  well  established  as  currency  among  the  In- 
dians that  the  court  of  Massachusetts  ordered  in  1649 
that  it  would  be  received  in  payments  of  debts  among  the 
settlers  to  the  amount  of  forty  shillings.  Rich  Indian 
chiefs  hoarded  the  wampum  even  as  miners  hoard  gold 
and  silver. 

In  the  agricultural  stage  we  find  a  great  change;  corn 
became,  in  the  European  states,  a  measure  of  value,  and  in 
I^orway  it  is  related  that  it  was  even  deposited  in  banks 
and  loaned  and  borrowed.  It  is  a  great  advantage  over 
articles,  in  that  it  is  easily  divisible  even  to  a  grain.    It  is 


328 


ECOITOMICS. 


known  that  grains  in  Central  America  were  formerly 
circulated  as  money.  So,  too,  in  America,  in  the  colonies, 
tobacco,  beans,  tar,  wheat  and  other  articles  were  not 
only  used  in  circulation  but  made  legal  tender  by  law 
for  the  payment  of  all  debts  and  obligations.  In  1618 
the  Governor  of  Virginia  ordered  that  tobacco  be  received 
at  the  rate  of  three  shillings  for  a  pound-weight,  and  the 
penalty  for  refusing  so  to  receive  it  was  three  years'  hard 
labor;  thus  it  was  made  legal  tender.  And  we  are  told 
that  when  the  Virginia  Company  imported  young  women 
as  wives  for  the  settlers  the  price  per  head  was  100  pounds 
of  tobacco,  which  was  subsequently  raised  to  150  pounds 
on  account  of  the  scarcity  or  superior  quality  of  the  goods. 

As  late  as  1732  the  Legislature  of  Maryland  made  to- 
bacco and  Indian  corn  legal  tenders.  And  so  we  find  that 
land  was  bought  with  tobacco ;  groceries  and  provisions 
were  bought  for  tobacco;  subscriptions  to  colleges  were 
made  with  tobacco ;  and  the  foundations  of  lotteries  made 
on  the  basis  of  tobacco.  So  South  Carolina,  in  1687,  made 
corn,  peas,  pork,  beef,  tobacco,  and  tar,  legal  tender.  In  an 
early  day  in  Oregon,  wheat  was  made  a  legal  tender  for 
the  payment  of  taxes  and  debts.  Cows  were  made  legal 
tender  for  taxes  in  Massachusetts  colony,  and  the  poorest 
cow  was  always  given  for  taxes. 

The  use  of  metals,  particularly  gold  and  silver,  repre- 
sented a  great  step  in  the  advance  of  commerce.  We  find, 
too,  that  the  lower  and  baser  metals  were  used  first  as  the 
principal  means  of  coinage,  but  were  generally  replaced 
by  gold  and  silver  as  the  chief  measures  of  value.  It  is 
difficult  to  determine  just  when  the  use  of  gold  and  silver 
began;  without  doubt  they  were  first  used  as  ornaments 


ECONOMICS. 


329 


on  account  of  their  brilliancy,  and  perhaps  their  supposed 
value.  They  were  long  desirable  before  they  were  used 
as  money.  Indeed,  in  their  earlier  period  they  were  doubt- 
less too  scarce  and  too  much  prized  to  be  used  in  common 
circulation. 

Although  bronze  and  tin  had  been  used  to  a  consider- 
ble  extent,  copper  became  the  first  metal  to  be  used  uni- 
versally, and  this  was  gradually  replaced  by  silver  and 
also  by  gold.  Iron  itself  was  used  in  very  early  days  in 
the  form  of  small  spikes,  which  were  exchanged  somewhat 
similar  to  the  bars  of  iron  which  are  now  used  in  trading 
with  the  Indians  of  Central  America.  And  not  long  ago, 
iron  money  was  in  use  in  Japan  for  small  values. 

Lead,  too,  has  often  been  used  as  currency, — it  is  men- 
tioned by  the  Greek  and  Latin  poets;  and  once,  in  1636, 
bullets  were  used  as  an  exchange  in  Massachusetts.  Lead 
is  now  currency  in  Burmah,  being  passed  by  weight  for 
small  payments. 

Tin  also  was  used  at  an  early  date.  It  was  produced 
from  Cornwall.  Doubtless,  the  first  coin  of  Britain  was 
composed  of  tin.  England  frequently  coined  tin;  in  1680 
tin  farthings  were  struck  by  Charles  11. ,  a  stud  of  copper 
being  inserted  in  the  middle  to  render  counterfeiting  more 
difficult. 

The  earliest  Hebrew  coins  were  composed  chiefly  of 
copper,  and  the  metallic  money  of  Rome  consisted  of 
copper,  down  to  the  year  281 ;  then  silver  was  first  coined. 
The  great  fault  in  copper,  its  low  value,  now  renders  it 
unfit  for  use  as  a  coin.  It  would  take  so  much  to  make 
a  coin  of  small  value  that  its  use  would  be  cumbersome. 
However,  in  China  and  in  other  Oriental  nations  we  find 


330  ECONOMICS. 

small  blocks  of  copper  now  in  circulation.  In  a  country 
where  there  is  such  infinitesimal  division  in  exchange, 
doubtless  it  might  be  used  to-day.  For  subsidiary  coinage, 
bronze  has  succeeded  copper  with  nations  of  the  world. 

Since  the  first  introduction  of  the  art  of  coinage,  silver 
has  been  coined  and  highly  prized  for  its  fine,  pure  white 
luster,  its  peculiar  qualities  making  it  desirable  for  money  3 
and  the  valuation  put  upon  it  for  use  in  the  arts  has  ren- 
dered silver  one  of  the  most  suitable  and  valuable  metals 
for  the  measurement  of  values.  Its  value  has  remained 
more  stable  for  long  periods  of  time  than  any  other  metal. 
And  one  reason,  as  we  shall  learn,  is  the  steady,  even  pro- 
duction of  silver,  and  the  great  stock  of  it  used  in  plate 
and  ornaments. 

But  gold  has  been  recognized  as  the  king  of  metals  be- 
cause of  its  great  desirability  due  to  its  peculiar  qualities, 
of  great  hardness,  malleability,  and  absolute  purity.  And 
these,  more  than  anything  else,  have  tended  to  render 
gold  sought  for  by  all  nations  of  all  times;  and  this  de- 
sire, coupled  with  legislation,  has  made  gold  exceedingly 
valuable,  so  that  it  has  always  ranged  more  valuable  than 
silver  from  the  earliest  times.  Other  metals  have  been 
used  as  money,  such  as  platinum,  coined  in  1825  and  1845 
in  Russia,  and  afterwards  abandoned  because  it  was  unfit 
for  currency,  being  too  difficult  to  coin  and  too  scarce. 
Nickel  also  has  been  used  to  a  considerable  extent.  There 
is  a  tendency  in  the  use  of  all  metals  to  use  the  highest 
grades  for  the  measure  of  value  for  large  transactions, 
and  to  use  the  cheaper  metals  for  subsidiary  coin  and  for 
small  transactions. 


ECONOMICS. 


331 


Kinds  of  Money. 

It  is  convenient  to  divide  money  into  various  kinds 
according  to  its  services.  Mr.  Ely  has  divided  it  into  Pop- 
ular money,  Legal  money,  Economic  money.  Popular 
money  is  that  which  is  accepted  by  the  people  regardless 
of  economic  or  legal  conditions.  Popular  money  is  best 
exemplified  in  the  definition  of  Mr.  Walker: 

"  That  which  freely  passes  from  hand  to  hand  through- 
out the  community  in  final  disc]iaige_JlLdeb±s^  and  in  full 
payments  of  commodities ;  being  accepted  equally  without 
reference  to  the  character  or  credit  of  the  person  who 
offers  it,  and  without  the  intention  of  the  person  who 
receives  it  to  consume  it  or  enjoy  it  or  apply  it  to  any 
other  use  than  in  turn  to  tender  it  to  others  in  discharge 
of  debts,  or  in  payment  of  commodities." 

Any  article  which  will  perform  these  services  may  be 
called  money,  whether  it  be  made  of  paper,  gold,  silver, 
or  lead. 

Legal  money  is  that  which  is  used  by  law,  and  has 
reference  to  legal-tender  goods  with  reference  to  money. 
Anything  that  is  established  by  law  as  money  is  a  legal- 
tender  good.  Legal-tender  money  is  not  always  popular; 
thus,  the  Treasury  note  or  "Greenback"  has  been  unpopu- 
lar at  times.  In  the  time  of  the  war,  in  California,  peo- 
ple refused  to  accept  them,  and  the  result  was  that  they 
did  not  circulate.  Frequently  coins  become  unpopular 
and  the  Government  is  obliged  to  recoin  them.  Again, 
on  the  contrary,  the  National  Bank  note  is  not  legal  ten- 
der, and  yet  is  among  the  most  popular  forms  of  money 
we  have  at  present. 

Economic  money  fulfills  the  following  conditions:  It 
must  serve  as  a  measure  of  value  and  a  medium  of  ex- 
change.   In  order  to  be  a  medium  of  exchange  it  must  be 


332 


ECONOMICS. 


popular,  and  to  a  certain  extent  be  legal  tender.  It  must 
be  the  means  of  making  deferred  payments,  and  also  it 
must  be  a  storage  of  value.  In  most  instances  money 
must  be  also  legal  tender ;  but  the  best  money  will  include 
all  of  these  functions.  It  must  be  popular,  being  readily 
received;  it  should  be  legal  tender,  to  answer  all  re- 
quirements in  the  law;  finally,  it  ought  to  be  economic 
in  fulfilling  the  above  conditions. 

Functions  of  Money. 

The  principal  functions  of  money  are  those  enumerated 
above:  to  be  a  medium  of  exchange,  measure  of  value, 
means  of  deferred  payments,  and  storage  of  value.  Money 
as  a  medium  of  exchange  is  the  most  popular  conception. 
In  this,  money  becomes  an  instrument  by  which  exchanges 
are  brought  about.  It  comes  from  the  expression  of  value 
of  two  articles  in  the  market  in  terms  of  one  article  which 
is,  in  primitive  society  at  least,  the  one  most  commonly 
recognized.  Whatever  money  is  most  convenient  for  this, 
other  things  being  equal,  is  the  best  money. 

Measures  of  Value. 
Money  measures  value  because  it  has  value,  and  only 
the  substances  which  have  value  can  be  used  as  money. 
Length  measures  length,  weight  measures  weight,  and 
value  measures  value.  All  measures  are  merely  compari- 
sons. Comparing  one  article  with  another,  we  get  a  meas- 
ure. When  we  say  a  table  is  two  yards  long,  we  express 
a  comparison.  The  length  of  the  table  is  to  the  length 
of  a  known  measure,  called  a  yard,  as  two  is  to  one.  When 
we  say  an  article  weighs  four  pounds,  we  say  the  weight 
of  the  article  is  to  the  weight  of  a  known  article,  called  a 


ECONOMICS. 


333 


pound,  as  four  is  to  one.  Wlien  we  say  the  value  of  an 
article  is  four  dollars,  we  simply  imply  that  the  value  of 
the  article  is  to  the  value  of  a  known  unit,  called  a  dollar, 
as  four  to  one.  All  money  in  exchange  is  a  measure  of 
value.  It  matters  not  what  the  money  is,  the  exchange 
implies  a  comparison  and  a  measure;  and  whether  it  be 
paper  or  gold,  if  it  performs  its  money  function,  it  is 
entitled  to  the  term  money. 

Standard  of  Value. 
We  should  distinguish  the  standard  of  value  from  the 
measure  of  value.  While  all  money  might  be  a  measure 
of  value,  not  all  money  is  a  standard  of  value.  Back  of 
all  moneys  is  one  to  which  all  are  referred  as  a  standard. 
To  understand  this,  we  should  observe  what  kind  of 
standard  of  measurement  we  have  in  regard  to  length. 
There  are  a  large  number  of  yardsticks  in  every  commu- 
nity. Every  one  is  a  measure  of  length ;  but  some  may  be 
longer  or  shorter  than  others,  still  they  are  measures  of 
length.  There  is,  however,  a  government  standard  of 
length,  to  which  all  other  yardsticks  are  referred.  This 
yardstick  is  the  standard  of  length,  based  upon  the  vibra- 
tions of  a  pendulum.  The  same  way  with  regard  to  a 
measure  of  weight.  There  may  be  several  scales  in  the 
community,  each  measuring  weight,  although  they  may 
vary.  There  is  one  standard  to  which  all  may  be  referred 
for  adjustment.  This  is  the  standard  of  weight  of  the 
government,  which  must  be  absolutely  correct.  So,  whether 
we  have  bank  notes,  silver  certificates,  gold  certificates, 
or  silver  money,  they  are  all  referred  to  gold  as  a  standard 
of  value. 


334  ECONOMICS. 

Deferred  Payments. 
In  modern  life  many  occasions  arise  for  contracts  ex- 
tending over  periods  of  time  of  greater  or  less  duration. 
When  exchanges  take  place  on  the  market,  usually  there 
is  no  consideration  of  time;  in  time  contracts,  however, 
this  is  a  very  important  consideration.  It  is  evident 
that  did  money  fluctuate  in  quantity  or  in  value  as  much 
as  do  many  commodities  on  the  market,  there  would  be  a 
great  element  of  risk  introduced  into  these  time  contracts, 
often  causing  heavy  financial  loss  to  one  or  the  other  of 
the  parties  concerned.  Great  demoralization  of  trade 
would  be  the  result.  Trade  would  not  increase  as  freely 
and  as  rapidly  as  it  would  otherwise,  and  possibly  there 
would  be  even  a  shrinkage  in  times  of  more  than  usual 
fluctuation  of  the  measuring  unit.  Hence  it  is  that  money, 
tvhich  by  its  nature  and  use  becomes  the  standard  of  de- 
ferred payments,  must  be  of  as  stable  a  character  as  possi- 
ble. The  precious  metals,  gold  and  silver,  have  been  found 
to  vary  much  less  than  probably  any  other  known  commod- 
ity, and  on  that  account  are  peculiarly  suited  for  use  as 
money.  Even  here,  however,  some  fluctuation  occurs.  To 
obviate  the  harm  arising  from  these  variations,  different 
standards  have  been  devised,  but  none  of  them  have  ever 
received  more  than  a  tentative  application. 

Multiple  Standard. 

One  of  the  suggested  means  for  avoiding  any  change 
in  the  standard  of  value  is  what  is  known  as  the  Multiple 
Standard.  The  term  refers  to  a  standard  composed  of  or 
based  on  a  number  of  articles  instead  of  one.  Thus,  a 
gold  standard  is  based  on  simply  the  one  article,  gold. 
A  bimetallic  standard  is  a  multiple  standard,  for  with  it 


ECONOMICS.  335 

two  metals  are  used  upon  which  to  base  the  money  stand- 
ard. What  is  known  as  a  tabular  standard  is  simply  a 
variation  of  the  principle  of  the  multiple  standard.  Ac- 
cording to  the  exemplification  of  this  method  as  given  by 
Dr.  Jevons,  the  present  monetary  systems  would  be  re- 
tained under  the  tabular  standard,  but  they  would  cease  to 
be  standards  for  deferred  payments.  Instead,  a  number 
of  staple  commodities  would  be  continually  compared  in 
their  relations  with  the  monetary  standard,  and  all  settle- 
ments would  be  made  in  money,  but  on  the  basis  of  the 
tabular  standard.  That  is,  to  quote  Mr.  Jevons :  "  Sup- 
pose that  a  debt  of  $100  was  incurred  upon  the  1st  of 
July,  1875,  and  was  to  be  paid  back  on  1st  July,  1878 ; 
if  .  .  .  the  value  of  gold  had  fallen  in  the  relation 
of  106  to  100  in  the  intervening  years,  then  the  creditor 
would  claim  an  increase  of  6  per  cent,  in  the  nominal 
amount  of  the  debt,  and  vice  versa^ 

Storage  of  Value. 
Another  of  the  functions  of  money  already  mentioned 
is  that  of  storage  of  value.  The  necessity  for  this  qualifica- 
tion in  good  money  arises  from  the  fact  that  were  an  arti- 
cle good  to-day  and  not  good  to-morrow  it  would  be  received 
in  trade  with  considerable  hesitation;  no  one  would  be 
willing  to  receive  it  unless  he  expected  to  be  able  to  dispose 
of  it  before  it  lost  its  value.  Such  a  lack  of  stability  and 
permanence  of  value  would  be  fatal  to  the  adaptability  of 
such  an  article  as  money.  When  a  person  disposes  in 
trade  of  goods  in  his  possession,  he  may  not  desire  to  in- 
vest immediately  the  proceeds  of  this  trade.  Hence  he 
wishes  to  receive  in  payment  for  his  goods  a  money  that 
will  not  shrink  in  value  during  the  period  that  he  retains 


336  ECONOMICS, 

it  uninvested.  In  other  words,  he  desires  to  receive  in 
exchange  for  his  goods  something  in  which  the  value  of 
the  goods  he  formerly  owned  can  remain  stored  until  he  is 
ready  to  use  it  again.  Convenience  in  storage  demands 
that  as  little  space  as  possible  be  occupied  by  the  article 
in  which  the  value  or  whatever  else  it  may  be  is  stored. 
Gold  and  silver,  because  of  the  great  value  possessed  by 
relatively  small  quantities,  are,  as  concerns  the  function 
of  storage  of  value,  peculiarly  fitted  for  use  as  money. 

Principles  of  Circulation. 

The  purchasing  value  of  money  depends  upon  the  de- 
mand and  supply  of  it,  and  not  upon  the  cost  of  its  pro- 
duction. The  consideration  that  governs  in  fixing  the 
price  of  an  article  in  exchange  is  not,  How  much  did  it 
cost  you?  but.  What  is  it  worth  to  me?  Of  course  its 
cost  to  the  producer  will  influence  his  willingness  to  part 
with  it,  up  to  the  point  where  he  receives  more  for  it 
than  it  cost.  The  demands  of  exchange  for  money  will 
depend  upon  the  amount  of  business  being  done,  and  hence 
the  value  of  money  will  naturally  be  dependent  upon  its 
supply  and  the  amount  of  business  being  carried  on. 
Should  the  supply  of  money  be  insufficient  to  complete  ex- 
changes, money  will  be  dear;  that  is,  it  will  purchase  a 
large  amount  of  commodities,  or  prices  will  be  low.  Should 
prices  continue  falling, — that  is,  money  be  continually 
growing  dearer, — it  is  evident  the  debtor  class  will  be  at 
a  disadvantage ;  their  debts,  reckoned  in  commodities,  will 
be  steadily  increasing  and  will  be  oppressive.  On  the 
other  hand,  an  extremely  cheap  money,  by  greatly  raising 
prices,  will  over-stimulate  trade  and  lead  to  speculation. 
This  is  one  of  the  almost  inevitable  evils  of  currency  in- 


ECOisroMics.  337 

flation.  A  condition  midway  between  these  two  extremes 
is  the  one  most  sought  after  by  financiers.  A  money  that 
just  turns  to  the  side  of  cheapness  without  being  cheap, 
will  give  a  gentle  and  consequently  healthy  stimulus  to 
trade. 

A  sudden  increase  in  the  value  of  money,  such  as  would 
be  brought  about  by  a  contraction  in  its  volume,  would 
lower  prices  from  the  mere  fact  that  there  would  be  less 
money  with  which  to  carry  on  exchanges  and  hence  more 
goods  would  have  to  exchange  for  the  same  amount  of 
money.  But  if  we  multiply  money  beyond  the  point  of 
saturation,  the  amount  needed  to  carry  on  exchanges  in 
the  most  perfect  manner,  its  individual  purchasing  power 
will  shrink,  prices  will  rise.  The  method  by  which  money 
gets  into  circulation  is  sometimes  detrimental  to  its  best 
use,  from  the  fact  that  it  may  interfere  with  normal  cir- 
culation. The  act  of  its  introduction  has  a  tendency  to 
disturb  the  equilibrium  of  money,  but  this  disturbance  is 
not  great  nor  serious.  Also,  the  irregularities  of  circula- 
tion demand  a  considerably  larger  amount  of  money  than 
would  be  necessary  were  the  circulation  more  constant. 
Large  amounts  of  money  are  hoarded  or  laid  away  for 
long  periods,  and  must  be  replaced  by  other  or  else  trade 
will  suffer  from  shrinkage  in  the  money  volume. 
Amount  of  Money  Needed  by  a  Nation. 

To  determine  the  amount  of  money  needed  by  any  coun- 
try, it  is  necessary  to  consider  many  secondary  matters. 
Of  course  the  amount  of  money  needed  will  tend  to  in- 
crease with  the  population.  Aside  from  the  amount  of 
the  population,  however,  the  amount  of  money  needed 
will  be  less  for  a  dense  population  than  for  the   same 

—22 


338  ECONOMICS. 

population  scattered  widely  over  considerably  more  terri- 
tory, for  in  the  latter  case  the  rapidity  of  circulation  will 
be  diminished.  This  rapidity  of  circulation  is  a  very  im- 
portant factor.  A  country  in  which  savings  are  promptly 
banked,  when  they  pass  again  quickly  into  the  circula- 
tion, or  where  money  is  otherwise  kept  in  constant  and 
rapid  circulation,  will  need  less  money  to  carry  on  the 
same  amount  of  business  than  one  in  which  money  is 
hoarded  and  circulates  but  sluggishly;  for  it  is  obvious 
that  if  money  pass  rapidly  from  hand  to  hand  it  will  accom- 
plish many  more  transactions  than  if  it  is  kept  for  a 
long  time  in  one  hand.  Where  much  business  is  being 
transacted,  more  money  is  of  course  needed.  This  brings 
about  a  condition  contrary  to  the  common  belief,  namely : 
that  if  commerce  be  increased  prices  will  fall,  because  of 
the  great  need  of  money,  unless  the  volume  should  be  in- 
creased to  keep  apace  with  the  increase  of  business.  The 
kind  of  money  to  fulfill  these  conditions  is  one  that  is 
freely  convertible,  full  legal  tender,  and  convenient  for 
a  free  and  rapid  circulation.  A  money  that  passes  freely 
in  but  a  part  of  the  country  will  disarrange  the  conditions 
for  calculating  the  amoimt  of  money  needed  to  accommo- 
date the  whole  country. 

Monometalism. 

Monometalism  is  a  term  applied  to  the  use  of  a  single 
metal  as  standard  money.  There  have  been  instances  of 
the  use  of  different  metals  as  the  standard  money  under 
a  monometallic  standard,  but  gold  is  the  metal  generally 
employed  for  a  single  standard.  With  this  system  other 
metals  are  commonly  used  for  token  or  subsidiary  coins. 


ECONOMICS. 


339 


Bixnetalism. 
Bimetalism,  as  opposed  to  monometalism,  is  the  system 
under  which  two  metals  are  used  for  the  coinage  of  stand- 
ard money,  either  of  them  being  a  lawful  standard  money. 
Any  two  metals  might  be  used  for  standard  money  under 
the  term  bimetalism, — a  good  many  have  been  used;  but 
gold  and  silver  are  the  two  that  commonly  are  used,  and 
are  those  meant  when  bimetalism  is  referred  to.  With 
a  bimetallic  standard  gold  and  silver  are  coined  into 
standard  money,  exclusive  of  subsidiary  coins  that  may 
be  made  from  either  of  these  or  from  other  metals.  When 
this  system  is  employed,  a  legal  ratio  is  fixed  at  which  the 
two  metals  are  to  be  coined,  and  this  ratio  should  be 
permanent. 

Paper  Money. 

Paper  money  may  be  of  many  kinds.  It  may  be  in  the 
form  of  bank  notes;  of  certificates  representing  gold  or 
silver  deposited  to  their  face  value;  of  certificates  repre- 
senting certain  forms  of  property,  such  as  land,  as  in  the 
case  of  the  French  assignats;  of  government  promises  to 
pay ;  or  it  may  be  simply  fiat  money,  or  paper  money  with- 
out security  of  any  kind,  circulating  merely  on  the  gov- 
ernment enactment  of  legal-tender  properties.  The  great- 
est danger  connected  with  the  issue  of  paper  money  is 
inflation,  with  its  consequent  evils.  After  one  issue  of 
paper  money,  others  follow  easily,  and  generally  end  in 
a  commercial  breakdown  and  great  distress.  The  issue  of 
fiat  money  has  been  admitted  by  some  economists  to  be 
theoretically  sound,  but  uncontrollable  in  practice,  and 
hence  dangerous.  To  be  safe,  paper  money  should  always 
be  limited  in  issue,  and  immediately  convertible.     This  is 


340 


ECON^OMICS. 


generally  the  case  with  gold  and  silver  certificates  and 
bank  notes. 

Paper  Money  and  Bank  Notes. 

The  amount  of  issue  of  bank  notes  is  generally  regulated 
by  law,  and  since  the  profit  resulting  from  circulation 
does  not  fall  to  the  government,  their  issue  is  much 
more  carefully  restricted  than  are  the  issues  of  paper 
money  from  which  the  profit  accrues  to  the  government. 
They  are  generally  secured  by  deposits,  property,  or  bonds. 
Bank  notes  form  an  elastic  kind  of  circulation,  as  they 
will  be  issued  according  to  the  demand  for  money.  Gold 
and  silver  certificates,  on  the  other  hand,  are  not  elastic. 
Government  notes  and  fiat  money  may  be  elastic  in  their 
issue,  but  as  they  may  not  be  readily  recalled  they  are 
unsafe. 

Monetary  History  of  the  United  States. 

In  the  earliest  history  of  American  civilization,  the 
money  used  was  the  money  of  old  countries.  At  times 
this  was  inadequate  to  perform  the  necessary  exchanges, 
and  acts  were  passed  by  the  different  colonial  legislatures 
authorizing  the  use  of  tobacco,  beans,  tar,  wheat,  and  even 
wampum,  as  a  legal  tender.  A  little  later  there  was  a  cer- 
tain amount  of  subsidiary  coinage  carried  on  by  the  colo- 
nies. But  the  most  important  currency  action  taken  by  the 
early  American  colonies  was  the  issue  of  paper  money  that 
was  floated  by  banks  and  by  the  colonial  governments. 
Probably  the  most  noted  instance  of  the  issue  of  paper 
money  by  the  colonial  governments  was  that  by  Rhode  Isl- 
and, where  issue  after  issue  of  depreciated  paper  money 
was  poured  out  upon  the  people.  It  all  fell  rapidly  in 
value,  and  frequently  caused  great  hardship  and  distress. 


ECONOMICS.  341 

The  continental  currency  was  the  next  attempt  of  the 
American  people  to  issue  paper  money.  This,  too,  depre- 
ciated, and  was  practically  a  failure,  having  ultimately  to 
be  abandoned. 

With  the  organization  of  the  United  States,  our  mone- 
tary history  was  marked  by  fewer  vagaries.  By  the  act  of 
April  2,  1792,  gold  and  silver  standard  money  and  sub- 
sidiary coins  were  authorized  and  their  coinage  begun. 
Previously  to  this,  in  1786,  a  law  had  been  passed  making 
the  Spanish  milled  dollar  the  standard  of  the  United 
States,  but  no  coinage  was  begun.  Gold  had  been  under- 
valued by  the  act  of  1792,  consequently  was  exported; 
and  the  act  of  1834,  changing  the  ratio  so  as  to  raise  the 
value  of  gold,  was  passed  to  remedy  this.  The  next  change 
was  by  the  act  of  February  21,  1853,  which  reduced  the 
subsidiary  coinage  to  the  status  of  token  money,  to  prevent 
exportation.  Previously  the  subsidiary  coins  had  been 
proportional  in  weight  to  the  dollar ;  thereafter  they  were 
made  of  less  than  their  face  value  of  metal.  In  1873 
the  unit  of  value  was  made  the  gold  dollar,  the  coinage  of 
the  trade  dollar  was  authorized,  but  the  standard  silver 
dollar  was  omitted.  The  legal-tender  property  of  the 
trade  dollar  was  removed  in  1876,  and  in  1887  its  coinage 
was  prohibited.  The  coinage  of  the  standard  silver  dollar 
was  resumed  by  the  act  of  1878,  but  was  on  the  govern- 
ment account,  and  not  on  the  account  of  individuals  as 
had  been  provided  in  the  early  acts  of  1792,  1833,  and 
1837.  By  the  Sherman  act,  in  1890,  the  purchase  of 
silver  for  the  purpose  of  coinage  was  ordered  increased, 
but  on  I^ovember  1st,  1893,  the  clause  authorizing  the 


342 


ECONOMICS. 


purchase  of  silver  for  coinage  into  standard  silver  dollars 
was  repealed. 

No  paper  money  was  issued  by  the  United  States  until 
1861,  at  which  time  the  "demand  notes"  were  authorized. 
These  were  speedily  followed  by  the  "greenbacks,"  the 
issue  of  which  eventually  reached  $449,338,902. 

References:  Jevons,  Money  and  the  Mechanism  of  Exchange; 
Jevons,  Investigations  in  Currency  and  Finance;  Nicholson, 
Money  and  Monetary  Reforms ;  Walker,  Money ;  Laughlin,  The  Prin- 
ciples of  Money ;  Scott,  William  A.,  Money  and  Banking ;  Bullock, 
C.  J.,  The  Monetary  History  of  the  United  States ;  Kinley,  David, 
Money. 


ECONOMICS. 


343 


CHAPTEK  V. 

CREDIT  AND  BANKING. 

Definition  of  Credit. 
Under  the  present  organization  of  society  it  is  impossi- 
ble to  carry  on  business  without  credit.  Credit  is  the 
power  to  command  present  wealth  or  services  in  exchange 
for  some  assurance  of  a  future  payment  or  return.  It  Is 
built  primarily  on  the  confidence  we  have  in  individuals 
to  pay.  'Not  only  must  we  have  confidence  in  their  ability 
to  pay,  but  also  in  their  integrity.  We  must  also  have 
confidence  in  the  property  which  is  used  for  security. 
When  these  two  conditions  are  secured,  then  there  is 
an  opportunity  to  carry  on  business  in  a  substantial  way. 
It  is  said  that  over  ninety  per  cent,  of  the  business  trans- 
actions of  the  world  is  done  on  credit;  that  is,  people  are 
to  this  extent  trusted  for  payment. 

Instruments  of  Credit. 

There  are  certain  evidences  of  credit  in  the  form  of — 
first,  promises,  such  as  individual  notes,  bank  notes,  de- 
posits, book  accounts,  stock  certificates,  and  bonds;  and 
second,  certain  orders,  such  as  postoffice  orders,  bills  of 
exchange,  checks,  and  mobilization  certificates.  These  mo- 
bilization certificates  are  simply  orders  for  the  delivery 
of  certain  goods,  such  as  petroleum,  pig-iron,  or  whisky, 
at  a  certain  place.  These  certificates  are  bought  and  sold, 
and  are  exchangeable;  their  object  is  to  facilitate  ex- 
changes in  the  speculative  market. 


344:  ECONOMICS. 

Credit  and  Value. 
The  relation  of  credit  to  value  is  difficult  to  deter- 
mine. Some  hold  that  credit  is  capital,  and  hence,  having 
value,  must  be  wealth.  So  far  as  the  individuals  are 
concerned,  the  credit  instruments  which  they  hold,  when 
they  are  orders  or  demands  upon  property,  may  be  con- 
sidered as  individual  capital,  and  consequently  wealth; 
but  the  issuing  of  exchange  certificates  to  individuals 
would  neither  increase  nor  decrease  the  wealth  of  the  com- 
munity, hence  they  could  scarcely  be  called  social  cap- 
ital.  In  one  sense,  credit  is  a  most  valuable  thing,  but 
it  is  a  valuable  means  rather  than  a  valuable  substance] 
it  has  no  material  existence  in  itself,  and  he  who  holds 
an  instrument  of  credit  must  understand  that  if  it  is  a 
resource  to  him,  it  is  a  liability  to  some  one  else;  if  it  is 
a  credit  to  him  it  is  a  debit  to  some  one  else.  Therefore 
it  cannot  be  classified  along  with  other  capital.  We  must 
insist,  that  even  though  certificates  may  form  an  evidence 
of  a  man's  resources,  they  do  not  form  additions  to  wealth ; 
nor  can  you  reckon  in  the  community's  wealth  the  titles 
to  the  same  property.  If  we  were  taking  a  category  of  the 
wealth  of  a  nation,  the  property  itself  and  the  titles  to  the 
property  could  not  be  counted  at  the  same  time. 

Advantag:es  of  Credit. 
Credit  has  nevertheless  many  economic  advantages.  It 
is  rather  a  means  of  wealth  than  wealth  itself.  It  bears 
the  same  relation  to  general  business  that  electricity  and 
steam  do  to  the  industrial  life.  First,  the  clumsy  method 
of  barter  was  superseded  by  the  use  of  money,  and  when 
money  became  deficient  or  too  slow  for  the  transaction 


ECONOMICS. 


345 


of  business,  credit  was  introduced.  By  means  of  it  small 
sums  of  money  may  be  collected  in  one  amount  and  used. 
These  small  sums  would  be  useless  unless  somebody  was 
intrusted  with  the  management  of  all.  It  also  collects 
capital  and  allows  it  to  be  used  through  more  productive 
hands.  It  likewise  supplies  a  powerful  motive  for  the 
accumulation  of  wealth.  Without  credit,  few  of  the  great 
enterprises  of  modern  times  could  be  carried  on.  The  rail- 
road would  be  built,  if  built  at  all,  by  the  capital  of  one 
man  instead  of  the  combined  capital  of  thousands.  Even 
the  factory  and  mill  must  be  built  on  the  credit  basis, 
otherwise  they  would  not  be  built. 

There  are  certain  forms  of  credit  which  may  have  ex- 
change value,  becoming  wealth  and  capital  at  the  same 
time.  Take,  for  instance,  immediately  redeemable  govern- 
ment paper.  It  is  covered  by  only  a  partial  reserve.  This 
passes  into  the  community  as  wealth  and  capital;  how- 
ever, if  the  government  is  estimating  its  own  material 
resources  it  becomes  a  doubtful  question  whether  it  is  capi- 
tal or  wealth.  It  cannot  estimate  it  any  other  way  than  a 
form  of  indebtedness  on  the  part  of  the  government.  It 
can  be  wealth  to  the  individual  who  holds  it  only  on  the 
basis  of  division  of  wealth,  he  holding  that  which  is  his 
share;  but  the  wealth  of  the  community  is  not  increased 
unless  perhaps  indirectly,  by  displacing  more  valuable 
money,  such  as  gold,  and  using  a  cheaper  instrument  in 
its  place.  The  gold  then  can  be  used  elsewhere  and  the 
paper  money  serves  to  increase  credit. 

Credit  Creates  Capital. 
It  is  not  an  agent  of  production,  such  as  land  or  labor, 
but  rather  a  special  mode  of  production,   a  method  of 


346  ECONOMICS. 

trade,  which  has  become  so  universal  that  it  is  recognized 
as  an  economic  function,  like  that  of  labor  and  exchange. 
By  it  all  forms  of  industry  are  quickened  and  the  means 
of  rapid  work  increased. 

Effects  of  Overstrained  Credit. 
Overstrained  credit  brings  commercial  crises  and  panics. 
It  promotes  indebtedness  on  the  part  of  the  poor,  and  some- 
times transfers  wealth  from  a  more  to  a  less  productive 
hand.  An  overstrained  credit  may  unduly  stimulate  de- 
mands, and  thus  raise  prices  and  introduce  commercial 

panics. 

Inflation  of  the  Currency. 

Overtrading  is  one  of  the  primary  causes  of  commercial 
crises.  People  who  buy  more  than  they  can  sell,  or  bor- 
row money  to  invest  in  trading  and  business  without  any- 
thing but  speculative  hope  of  return,  find  themselves  sud- 
denly short  in  their  accounts.  When  a  call  for  cash 
comes  there  is  not  enough  to  go  around,  and  one  trading- 
house  after  another  must  suspend  payments.  The  result 
is,  that  they  have  traded  on  fictitious  values  with  the  hope 
of  real  profits.  This  condition  is  frequently  enhanced  by 
an  inflation  of  the  currency,  which  gives  undue  encourage- 
ment to  business  on  account  of  the  fictitious  profits,  which 
seem  much  greater  than  they  are.  It  also  develops  a 
speculative  tendency,  and  builds  up  business  on  a  weak 
foundation.  The  remedy  frequently  applied  is  to  throw 
out  more  money  to  satisfy  the  demand,  but  this  only  in- 
creases the  evil.  Prices  continue  to  rise,  and  people,  in 
a  vain  attempt  to  realize  the  supposed  results  of  these 
high  prices,  go  into  excessive  business  and  over-borrow. 


ECONOMICS. 


347 


Finally,  there  is  a  collapse  in  these  fictitious  values,  and 
a  failure  of  certain  houses,  which  pull  down  others  and  in- 
volve very  many.  There  is  then  a  long  period  of  com- 
mercial retrenchment  on  account  of  the  contraction  of 
business;  money  is  scarce,  and  business  reaches  a  point 
of  stagnation. 

Banks  as  Centers  of  Business. 

Banks  are  centers  of  business,  because  they  furnish  the 
free  capital  with  which  to  carry  on  old  business  or  to 
establish  new.  They  are  sometimes  called  the  nerve-cen- 
ters of  the  business  system;  hence  they  are  indicators  of 
prosperity  or  of  depression,  and  a  sound  banking  system 
is  always  essential  to  a  healthy  commercial  condition. 

Banks  act  as  depositories  of  funds.  They  have  sprung 
up  naturally  and  essentially  for  this  purpose.  Were  all 
the  banks  abolished  to-day,  some  method  of  banking  would 
be  instituted  before  the  day  was  over.  Serving  as  depos- 
itories, they  are  the  custodians  of  the  funds  used  in  carry- 
ing on  trade.  They  also  serve  as  means  of  making  issue 
of  money  or  bills  for  the  purpose  of  exchange,  although 
this  may  not  be  an  essential  function  of  banks.  They 
are  used  almost  universally  for  making  deferred  payments, 
for  collecting  and  discounting  bills.  As  such  they  have 
been  regulated  in  diiferent  ways  in  different  countries. 

Biss  of  Banking. 
The  earlier  banks  began  with  a  very  limited  business. 
The  Bank  of  Venice  was  one  of  the  oldest  organized, 
established  in  1171  as  a  bank  of  deposit.  It  issued  no 
notes,  and  transfers  could  be  had  only  on  the  books  of  the 
bank.     The  Bank  of  Amsterdam,  organized  in  1609 ;  the 


348 


ECONOMICS. 


Bank  of  Hamburg,  in  1619;  the  Bank  of  England,  in 
1694;  the  Bank  of  France,  in  1800, — all  had  rather  prim- 
itive banking  functions,  excepting  the  banks  of  France 
and  England.  The  Bank  of  Venice  from  its  foundation 
was  controlled  bj  the  state,  and  was  a  mere  method  of 
security  against  bad  paper  and  bad  coins.  The  Bank  of 
Amsterdam  originated  from  the  distrust  of  poor  coins,  and 
its  paper  guaranteeing  full  weight  was  held  at  a  premium 
above  the  cheaper  coins. 

What  Constitutes  a  Sound  Banking  System. 

A  banking  system,  to  be  sound,  must  have  a  sufficient 
banking  capital,  adequate  to  the  business  done.  Certain 
laws  should  be  established  in  regard  to  deposits,  loans 
and  circulation,  invisible  and  tangible  property,  at  all 
times  sufficient  to  meet  the  legitimate  demands.  Beyond 
this,  in  the  case  of  banks  of  issue  the  notes  should  be 
doubly  secured. 

There  are  two  great  methods  of  banking:  one  is  the 
state  banking  system,  in  which  the  government  becomes 
responsible,  owning  and  operating  its  banking  business; 
the  other  is  a  private  banking  system,  in  which  indi- 
viduals are  permitted  to  carry  on  independent  banking. 
Sometimes  private  banks  have  a  large  amount  of  govern- 
ment inspection  and  control,  which  makes  a  third  class. 
A  free  banking  system  permits  certain  individuals  to  carry 
on  banking  under  a  general  law  established  by  the  govern- 
ment. All  that  is  required  is  to  fulfill  certain  conditions, 
no  requirements  excepting  for  safety  and  general  con- 
venience being  established.     In  such  cases  the  bank  notes 


ECONOMICS.  349 

should  not  be  legal  tender,  but  should  simply  be  secured  bj 
the  resources  and  assets  of  the  bank.* 

Bank  of  Eng^land. 

The  Bank  of  England  was  chartered  in  1694,  and,  like 
most  of  the  early  banks,  had  its  origin  in  financiering. 
Certain  persons  agreed  to  loan  the  government  £1,200,000 
for  the  purpose  of  carrying  on  the  war  with  France,  on 
the  condition  that  they  should  be  organized  and  chartered 
under  the  title  of  The  Bank  of  England.  One  of  the  favor- 
ite conditions  also  was,  that  it  had  a  monopoly  of  the  note 
issue, — all  corporations,  excepting  the  Bank  of  England, 
having  more  than  six  persons,  not  being  allowed  to  issue 
notes.  In  1826  branches  of  the  Bank  of  England  were 
established  at  different  places,  and  joint-stock  conipanies 
situated  more  than  sixty  miles  away  from  London  were 
allowed  to  have  the  privilege  of  issuing  bank  notes.  This 
curtailed  to  a  certain  extent  the  monopoly  enjoyed  by  the 
Bank.  In  1844  Mr.  PeeFs  celebrated  Bank  Act  sepa- 
rated the  note-issue  department  from  the  banking  depart- 
ment, and  limited  the  paper  currency  of  the  country  so 
as  to  make  it  rise  and  fall  in  conformity  with  the  move- 
ment of  gold  coin  and  bullion.  It  was  provided  that  the 
issue  department  might  send  out  £14,000,000  of  notes 
based  upon  government  securities,  and  for  every  note 
issued  above  that  amount  its  equivalent  in  gold  coin  or 
bullion  must  be  deposited.  By  the  process  of  absorbing 
the  liabilities  of  other  banks  the  amount  of  notes  issued 
on  government  security  has  been  increased  to  £16,800,000. 
Thus  it  appears  that  the  only  way  of  increasing  the  cir- 
culation of  the  Bank  is  to  bring  in  gold  for  deposits  from 

*  Such  jiotes  should  be  allowed  to  circulate  to  such  extent  us  the  credit  of  the  issuing 
bank  makes  people  willing  to  accept  them. 


350  ECONOMICS. 

the  outside,  which  renders  it  elastic  up  to  a  certain  point 
only. 

The  notes  of  the  Bank  of  England  have  been  legal 
tender  since  1833,  "so  long  as  the  Bank  of  England  shall 
continue  to  pay  on  demand  their  said  notes  in  legal  coin.'' 
The  issue  of  bank  notes  in  1896  was  for  £59,776,325,  and 
£42,968,325  of  this  was  issued  on  gold  coin  and  bullion. 

Bank  of  France. 
The  Bank  of  Erance  was  organized  in  1800,  but  was 
reorganized  in  1848.  It,  with  its  branches,  is  the  only  bank 
of  issue  in  Erance.  Its  capital  when  it  was  first  founded 
was  30,000,000  francs,  which  has  been  gradually  increased 
to  500,000,000.  As  far  as  its  capital  is  concerned  it  is  a 
private  institution,  belonging  to  the  shareholders,  but  the 
governor  and  two  assistant  governors  are  appointed  by  the 
president  of  the  republic,  and  are  removable  at  his  will.  It 
may  issue  legal-tender  notes  to  any  amount  it  pleases, 
according  to  charter,  although  the  amount  issued  is  limited 
by  law  to  4,000  million  francs.  Under  this  limit  the 
whole  amount  is  left  to  the  discretion  of  the  managers 
of  the  Bank.  The  denominations  of  its  notes  range  from 
five  francs  to  1,000  francs.  These  bank  notes  are  payable 
in  coin  on  demand,  in  either  gold  or  silver.  In  practice 
the  government  pays  gold  or  silver,  to  please  the  person 
who  presents  the  note;  but  in  case  of  deficiency  of  gold 
it  puts  a  small  premium  on  gold,  in  order  to  keep  the 
equilibrium.  The  coin  reserve  is  very  large,  having  been, 
in  1895,  3,184,000,000  francs,  of  which  nearly  half  was 
silver. 


ECONOMICS. 


351 


National  Banks  of  the  United  States. 

The  banking  system  of  the  United  States  has  had  a  pe- 
culiar history.  The  first  and  second  national  banks  of  the 
United  States  were  more  or  less  under  the  patronage  of 
the  government,  though  they  were  semi-private  institu- 
tions. The  government,  finally  failing  in  its  banking- 
project,  w^ent  out  of  the  business.  During  the  whole  period 
certain  private  banks  were  chartered  from  time  to  time. 
The  banking  system  was  built  up  from  charters  issued  by 
the  States,  or  under  general  laws  of  the  various  States  of 
the  Union. 

In  1863  the  present  I^ational  Banking  System  was  es- 
tablished. The  object  of  its  establishment  was  to  unify 
and  render  secure  the  banking  system  of  the  United  States. 
The  laws  for  the  establishment  of  the  State  banks  were  so 
various,  and  the  advantages  taken  of  these  laws  were  so 
great,  that  it  led  to  an  unsafe  and  unsound  system  of 
banking.  Much  of  the  paper  became  depreciated  and 
worthless  and  some  of  the  banks  failed,  on  account  of  the 
loose  legislation.  There  was  no  unity,  no  system,  no  uni- 
form foundation  for  credit.  A  banking  system  was  pro- 
posed which  should  remedy  these  evils.  Another  object 
was  to  market  the  United  States  bonds,  they  being  used  as 
'security  for  the  circulation  of  these  banks. 

Org^anization. 
Any  five  persons  in  any  city  or  town  could  organize 
a  bank,  by  complying  with  the  law.  In  places  of  less 
than  6,000  inhabitants  there  must  be  $50,000  capital; 
places  having  over  6,000  and  less  than  50,000  inhabitants 
could  establish  banks  with  $100,000  capital;    while  in 


352  ECONOMICS. 

places  having  over  50,000  people  there  must  be  a  capital 
of  $200,000.  One-half  of  the  capital  must  be  paid  up  be- 
fore beginning  business,  and  the  other  half  within  five 
months.  For  the  security  of  the  circulation  it  is  neces- 
sary that  the  bank  purchase  an  amount  of  bonds,  which 
are  to  be  deposited  in  the  Treasury  of  the  United  States. 
ISTinety  per  cent,  of  the  par  value  of  the  bonds  may  be 
issued  in  uniform  bank  notes  signed  by  the  president  and 
cashier  of  the  bank  issuing  them.  A  fund  equal  to  five 
per  cent,  of  this  outstanding  circulation  must  be  depos- 
ited at  Washington  for  the  redemption  of  these  notes.  It 
is  not  necessary  that  the  bank  issue  notes  at  all,  but  it  is 
required  to  keep  on  deposit  with  the  Treasurer  of  the 
United  States  a  certain  amount  in  bonds.  For  banks  of 
$150,000  or  less  capital,  the  minimum  is  one-fourth  of 
their  capital,  and  for  banks  of  more  than  $150,000  it  is 

$50,000. 

Begulation. 

The  whole  system  is  placed  under  severe  rules,  regula- 
tion, and  government  inspection.  The  notes  are  doubly 
secured  by  the  resources  of  the  bank,  double  liability  of 
stockholders,  and  the  bonds  deposited  with  the  United 
States  Government.  Depositors  are  secured  on  the  re- 
sources of  the  bank,  including  the  double  liability  of  stock- 
holders. 

The  banking  and  currency  law  of  March,  1900,  made  a 
few  very  important  changes.  Among  other  things,  it 
provided  that  the  gold  dollar  consisting  of  25.8  grains  of 
gold  nine-tenths  fine  should  be  the  standard  unit  of  value, 
and  all  other  forms  of  money  issued  by  the  United  States 
should  be  maintained  at  parity.     It  provided  for  the  re- 


ECONOMICS. 


353 


demption  of  the  coin  certificates  of  July  14,  1890,  in 
gold,  and  for  the  maintenance  of  a  reserve  fund  for  that 
purpose.  It  further  provided  that  silver  certificates  of 
over  ten  dollars  denomination  should  not  be  issued  except 
in  case  the  Secretary  of  the  Treasury  might,  if  he  deemed 
it  necessary,  issue  not  to  exceed  in  the  aggregate  ten  per 
cent,  of  the  total  volume  of  said  certificates  in  the  higher 
denominations.  The  law  also  permits  the  establishment 
of  national  banks  of  $25,000  capital  in  towns  having  not 
over  3,000  people.  For  the  increase  of  bank-note  circula- 
tion it  was  provided  that  notes  might  be  issued  to  an 
amount  equal  to  the  par  value  of  the  United  States  bonds 
deposited  for  that  purpose.  Also,  that  when  the  two-per- 
cent, refunding  bonds  are  used  for  the  purpose  of  securing 
circulation,  the  taxes  on  average  circulation  of  notes  shall 
be  reduced  to  one-half  of  one  per  cent,  per  annum.  The 
law  further  provides  for  treasury  divisions  of  issue  and 
redemption,  which  keep  all  of  the  records  and  accounts  re- 
lating to  the  issue  and  redemption  of  United  States  notes. 
The  purpose  is  to  separate  the  note-issue  department  from 
the  ordinary  fiscal  work  of  the  treasury.  Other  provisions 
of  minor  importance  relating  to  the  banking  and  monetary 
system  of  the  United  States  were  made.  Upon  the  whole, 
the  banking  system  as  now  established  represents  a  safe, 
substantial  and  fairly  elastic  system. 

One  of  the  greatest  difficulties  to  be  overcome  in  any 
bank-note  issue  is  that  of  inelasticity.  The  present  na- 
tional banking  system  of  the  United  States  has  been  defect- 
ive in  this  respect.     Secured  by  United  States  bonds,  the 

amount  of  the  circulation  expanded  and  contracted  accord- 
—23 


354 


ECONOMICS. 


ing  to  the  amount  of  bonds  purchased.  When  bonds  were 
at  a  very  high  premium  it  proved  to  be  a  losing  business 
with  the  banks,  and  they  withdrew  their  circulation  just 
at  the  time  when  it  was  most  needed  by  the  people. 

Canadian  Banking  System. 
The  Canadian  banking  system  seems  to  have  more 
elasticity  in  this  respect.  There  are  central  banks  and 
branch  banks.  Sixteen  banks  maintain  nearly  340 
branches,  while  of  the  remaining  twenty-two  banks,  eight 
have  no  branches  at  all.  l^otes  may  be  issued  up  to  the 
paid-up  capital  of  each  bank,  with  the  exception  of  the 
Bank  of  British  I^orth  America  and  La  Banque  du 
Peuple,  neither  of  which  is  permitted  to  issue  circulating 
notes  to  an  amount  greater  than  seventy-five  per  cent,  of  its 
paid-up  capital  unless  otherwise  provided  for.  The  notes 
are  secured  against  the  assets  of  the  bank,  including  the 
double  liability  of  stockholders.  Each  bank  is  required 
to  keep  on  deposit  an  amount  equal  to  five  per  cent,  of 
its  average  circulation  for  the  previous  fiscal  year.  This 
deposit  bears  interest  at  the  rate  of  three  per  cent,  per 
annum.  This  makes  a  redemption  fund  which  shall  be 
used  for  the  payment  of  the  notes  of  any  failing  bank  if 
such  bank  does  not  make  provision  for  such  payment  within 
two  months  after  the  date  of  suspension.  By  means  of 
establishing  various  branches  the  demands  of  the  people 
are  fully  met,  and  by  the  method  of  issue  such  elasticity 
is  secured  that  the  amount  of  notes  sent  out  varies  twenty 
per  cent,  above  normal  circulation  when  excessive  demands 
are  made  for  currency. 


ECONOMICS. 


355 


Savings  Banks. 
These  are  among  the  best  modern  institutions  for 
the  encouragement  of  thrift  and  industry.  The  question 
of  saving  means  simply  that  the  individual  will  deny  him- 
self unnecessary  and  trivial  expenses  for  a  larger  and 
better  use  of  the  money  at  other  times.  One  of  the  unfor- 
tunate things  regarding  savings  banks  throughout  the 
Union  is  that  they  have  not  been  properly  restricted  ac- 
cording to  law,  and  have  been  left  to  private  individuals 
who  have  not  been  responsible  agents;  hence  the  failure 
of  their  savings  banks  has  been  disastrous  to  many  com- 
munities. The  failure  of  the  savings  banks  has  a  more 
demoralizing  influence  on  humanity  than  the  failure  of  any 
other.  If  private  parties  are  to  be  allowed  to  carry  on 
savings  banks  they  should  be  under  the  most  strict  govern- 
mental regulations,  and  actual  security  of  the  deposits 
guaranteed  by  the  state. 

Postal  Savings  Banks. 

Several  countries  have  facilitated  the  method  of  saving 
by  establishing  postal  savings  banks;  that  is,  the  estab- 
lishment of  savings  banks  in  connection  with  the  post- 
office.  A  card  having  room  for  a  certain  number  of 
postage  stamps  is  issued  for  the  smaller  deposits.  When 
a  postage  stamp  is  bought  it  is  placed  upon  the  card ;  when 
the  card  is  full  it  is  returned,  and  credit  given  for  the 
amount  on  the  card.  Larger  amounts  are  deposited  di- 
rectly, and  credit  given  on  the  whole  amount.  Interest 
is  paid  on  all  of  these  deposits.  The  deposit  allowed  by 
one  individual  is  limited.  The  whole  system  is  one  of 
economy,  from  which  the  banking  principles  reach  the 


366 


ECONOMICS. 


people  in  the  most  convenient  way.  Every  state  would 
find  this  a  convenient  and  economic  method  for  encourag- 
ing savings  and  developing  the  banking  system. 

References:  Dunbar,  History  and  Theory  of  Banking;  Bolles, 
Practical  Banking ;  Gilbert,  History  and  Theory  of  Banking ;  Co- 
nant.  History  of  the  Banks  of  Issue  ;  Breckenridge,  The  Canadian 
Banking  System;  Taussig,  The  Silver  Situation  in  the  United 
States;  Cleveland,  F.  A.,  The  Bank  and  the  Treasury;  Cannon,  J.  G., 
Clearing  Houses;  Mitchell,  A  History  of  the  Greenback. 


ECONOMICS.  357 


CHAPTEE  VI. 

PROCESSES  OF  EXCHANGE. 

Organization  of  Exchange. 

Exchange  is  one  of  the  most  important  branches  of 
Political  Economy,  as  it  permits  the  utilization  of  all 
surplus  products  of  individuals  or  nations.  People  are 
thus  enabled  to  carry  on  certain  lines  of  industry,  and 
exchange  their  surplus  products  for  the  surplus  products 
of  other  industries.  This  brings  the  utility  of  the  whole 
world  into  service,  and  saves  time  and  energy. 

In  primitive  society  exchange  was  very  light.  It  con- 
sisted in  moving  those  articles  possessed  of  relatively  great 
value  in  small  compass  or  bulk,  and  was  not  carried 
on  systematically.  By-and-by  we  find  the  development  of 
a  systematic  trade  through  peddlers  who  carried  their  wares 
about  with  them,  or  by  caravans  exchanging  the  surplus 
products  of  different  countries.  Then  in  the  early  periods 
of  civilization,  down  to  the  Middle  Ages,  a  large  propor- 
tion of  the  goods  manufactured  was  consumed  at  or  near 
the  place  of  manufacture.  The  trading  by  ships  on  the 
sea  brought  various  luxuries  to  the  ports  for  exchange; 
but  after  canal,  railroad,  river^  lake  and  ocean  traffic  be- 
come developed,  all  material,  light  or  heavy,  is  easily  ex- 
changed. 

So  complete  is  this  exchange  of  surplus  products  that 
even  vegetables  are  transported  around  the  world.  One 
can  enter  any  town  in  the  interior  and  find  there  the 


358 


ECONOMICS. 


fresh  fruits  of  nearly  every  country.  To-day  we  find  ex- 
changes being  organized  throughout  the  world:  certain 
persons  handle  certain  kinds  of  goods, — others,  other 
kinds ;  certain  persons  agree  to  carry  goods  from  place  to 
place;  certain  organizations  are  ready  to  furnish  certain 
goods  at  any  time  to  any  reasonable  amount. 

Importance  of  Exchange. 

All  legitimate  exchange  is  an  increase  of  utility,  for  it 
enables  persons  to  exchange  the  surplus  of  one  article  for 
another  of  which  there  is  a  deficiency.  A  large  surplus 
of  corn  in  Kansas  would  remain  useless,  to  decay  or  to 
be  used  for  fuel,  unless  it  could  be  exchanged  for  ma- 
chinery or  furniture  or  dry  goods  or  the  vegetable  products 
of  other  countries.  Exchange  enables  Kansas  to  produce 
corn,  wheat,  and  cattle, — those  products  for  which  it  is 
particularly  adapted.  Certain  territories  that  can  produce 
articles  at  a  greater  advantage  than  others  can  exchange 
these  articles  for  the  others  which  are  necessary  or  con- 
venient, created  in  other  districts,  at  great  advantage. 
This  increases  the  productivity  of  labor  and  of  capital, 
for  it  enables  various  persons  to  be  encouraged  in  pursuits 
for  which  they  are  particularly  adapted,  and  they  must 
thus  pursue  those  indutries  which  are  best  suited  to  their 
capacity  and  condition.  It  is  evident  that  in  all  legiti- 
mate trade  or  exchange,  all  parties  engaged  are  profited 
thereby.  The  theory  that  if  two  persons  trade  one  must 
gain  and  the  other  lose,  is  entirely  improper.  The  fact 
is  that  people  who  trade  should  each  gain  thereby.  That 
is  the  real  fundamental  principle  in  all  exchange.  The 
poorest  workman  in  a  small  town  has  the  advantages  of 


ECONOMICS. 


359 


exchange.  While  he  works  by  the  day  in  building  stone 
walls,  he  sits  down  at  a  meal  where  the  table  is  supplied 
from  the  products  of  the  world,  and  he  enjoys  his  clothing 
from  various  countries. 

Means  of  Exchange. 

There  is  developed  a  large  class  of  traders  whose  entire 
business  is  to  make  exchanges  between  different  communi- 
ties, countries  and  individuals.  Those  people  are  indis- 
pensable to  modern  industrial  life.  Various  attempts  have 
been  made  to  get  rid  of  "middlemen,'^  who  bring  the  pro- 
ducer and  consumer  together  for  the  purpose  of  exchange. 
This  attempt  has  failed.  To  a  certain  extent  this  class 
has  become  too  large  in  many  instances.  In  our  small 
towns  as  well  as  in  our  large  cities  there  are  too  many 
tradesmen  and  too  many  agents  who  carry  on  legitimate 
business.  From  time  to  time  this  readjusts  itself,  and  the 
tradesmen  turn  to  productive  enterprises. 

To-day  we  find  the  postofiice,  the  express  companies, 
freight  companies,  railroad  and  transportation  companies 
always  ready  to  transport  goods  with  facility  and  dispatch 
to  any  part  of  the  world.  In  the  aid  of  these  the  telegraph, 
the  telephone  and  the  postal  service  render  communi- 
cation almost  perfect.  In  connection  with  this  we  find 
the  use  of  many  great  facilities  for  trade,  but  more  ex- 
pressly the  credit  system,  which  is  an  instantaneous  pro- 
cess for  meeting  the  demands  of  exchange.  The  banking 
and  credit  systems  of  the  world  complete  this  great 
mechanism  of  exchange.  The  clearing-houses  of  countries 
and  of  the  world  render  the  system  of  debt-payment  almost 
perfect.    Back  of  all  this  economic  mechanism  is  the  legis- 


360  ECONOMICS. 

lation  of  states  and  nations  concerning  the  administration 
of  commerce.  This  involves  a  system  of  rules  and  regula- 
tions and  laws  for  the  proper  conduct  of  all  such  payments 
and  of  all  forms  of  commerce  and  trade. 

The  ISarket. 
The  market  is  a  place  where  buyers  and  sellersjeome 
toc:ether  for  the  purpose,  of  exchanging  wares.  This  may 
be  either  local  or  general ;  it  may  be  either  a  retqjl  market 
or  a  wholesale.  The  fundamental  principles  are  the  same 
in  either  case.  For  example,  there  may  be  such  a  thing 
as  a  horse  market.  This  may  be  local,  where  a  certain  num- 
ber of  horses  are  offered  for  trade  and  a  certain  number  of 
buyers  come  together  to  make  the  exchange.  The  idea  of 
a  horse  market  may  be  so  enlarged  as  to  include  the  market 
of  a  whole  country,  or  of  the  world,  in  which  the  horse 
market  is  daily  weak  or  strong  and  horses  may  or  may  not 
be  in  good  demand.  The  retail  market  is  a  place  where 
goods  are  sold  in  small  quantities.  The  rates  are  different 
in  each  case,  and  market  quotations  have  become  general- 
ized. In  either  case  there  is  no  market,  so  called,  until 
the  regular  price  has  been  established  according  to  the 
law  of  supply  and  demand, — the  amount  offered  on  one 
side  and  the  amount  demanded  on  the  other.  By  the  use 
of  a  well-established  market  people  understand  whether 
they  are  paying  too  much  or  too  little  for  any  line  of 

goods. 

Domestic  Exchangre. 

Domestic  Exchange  is  a  term  used  to  designate  local 
exchange  when  applied  to  a  nation  or  community.  It  is 
an  exchaujO'e  of  manufactured  goods  or  farm  products,  or 


ECONOMICS. 


361 


raw  materials  or  finished  products.  Indeed,  all  of  the 
various  products  of  a  country  can  exchange  for  home  con- 
sumption. This  is  called  the  Domestic  Market.  In  a 
domestic  market  an  article  usually  has  the  same  price 
over  the  entire  country  plus  or  minus  the  cost  of  trans- 
portation. Yet  there  are  great  centers  like  E^ew  York 
and  Chicago  which  have  a  tendency  to  fix  the  price  of 
domestic  products.  However,  every  small  town  has  its  own 
local  market,  and  prices  will  vary  slightly  according  to 

conditions. 

Foreign  Exchange. 

Foreign  Exchange  is  the  trade  of  one  nation  with  an- 
other. In  this  respect  the  nation  does  not  trade  as  an 
individual  with  another  one,  but  settles  its  balances.  In- 
dividuals of  one  country  trade  with  individuals  of  another, 
but  in  the  settlement  of  balances  a  system  of  barter  is 
introduced  as  between  one  nation  and  another.  The  settle- 
ment of  balances  between  one  country  and  another  is 
carried  on  by  the  purchase  and  sale  of  exchange,  so  that 
the  debts  of  one  country  offset  the  debts  of  another  and 
the  balances  are  paid.  Individuals  of  each  nation  will 
trade  with  one  another  when  it  is  an  advantage  for  them 
to  trade,  and  when  that  advantage  ceases  trade  will  cease. 
Long-continued  trade  is  kept  up  only  on  the  basis  of 
mutual  advantage. 

International  Values. 
Owing  to  the  fact  that  one  country  may  produce  an 
article  much  cheaper  than  another,  prices  in  one  will  vary 
from  those  of  another,  and  there  will  be  established  cer- 
tain international  values  when  there  are  no  restrictions. 


362 


ECONOMICS. 


However,  international  trade  is  not  widely  different  from 
domestic  trade,  except  in  the  method  of  settling  balances, 
and  even  that  difference  is  not  marked.  The  mode  of 
foreign  exchange  varies  little  from  that  of  domestic  ex- 
change. The  buying  and  selling  between  foreign  countries 
is  conducted  very  much  the  same  as  buying  and  selling 
between  different  parts  of  one  great  country.  If  a  man 
in  California  buys  a  bill  of  goods  in  'New  York,  he  buys 
exchange  on  ^ew  York  for  the  payment  of  those  goods, 
and  the  State  of  California  has  not  transacted  any  business 
with  the  State  of  New  York.  The  same  is  true  with  the 
man  in  J^ew  York  who  buys  a  bill  of  goods  in  London: 
he  pays  for  them  by  purchasing  exchange  on  London.  The 
American  government  and  Great  Britain  are  not  parties 
to  the  transaction,  except  so  far  as  they  regulate  it  by  laws 
of  exchange.  Hence  it  must  follow  that  international 
values  are  not  widely  different  from  national  values.  It 
appears  that  very  many  false  notions  have  risen  in  the 
minds  of  students  on  account  of  the  carelessness  of  writers 
on  this  point.  The  trade  of  Great  Britain  with  the  United 
States  is  not  a  national  process,  but  an  individual  affair. 
The  effects  on  the  nations  may  vary  on  account  of  the  ship- 
ment of  gold  from  one  to  the  other,  but  the  same  might 
occur  bet  wen  New  York  and  San  Francisco.  If  a  shortage 
of  gold  occurs  in  a  nation  it  may  affect  government  finan- 
ciering, while  the  difference  in  the  amount  of  gold  on  hand 
between  I^ew  York  and  Chicago  would  have  nothing  to  do 
with  our  national  financiering.  The  difference  between 
our  exportation  of  gold  between  ITew  York  and  London 
might  have  considerable  effect  on  our  national  financier- 
ing ;  otherwise  the  principle  remains  the  same. 


ECONOMICS.  3d3 

There  are,  however,  such  things  as  international  values, 
dependent  to  a  large  extent  on  the  immobility  of  labor, 
capital,  and  the  various  conditions  of  business.  Because 
transportation  and  communication  are  so  much  facili- 
tated, there  is  a  tendency  for  wages  and  interest  to  be 
equalized  all  over  the  globe,  and  also  for  the  same  grade 
of  goods  to  have  the  same  price  everywhere,  plus  or  minus 
the  transportation.  Hence  tradesmen  make  more  out  of 
the  element  of  time  than  anything  else,  which  of  course 
from  an  economic  standpoint  tends  to  reduce  profits  more 
to  the  average  of  interest  on  capital,  plus  the  service  of 
management. 

There  are  what  are  known  as  natural  advantages  for  the 
production  of  certain  lines  of  goods,  and  to  these  may  be 
added  artificial  advantages,  including  long  experience 
in  a  business  and  the  development  of  skilled  labor,  which 
make  a  difference  in  values  of  articles  and  stimulate  inter- 
national commerce.  International  trade  thus  enables  a 
community  to  furnish  goods  which  cannot  be  produced  at 
home  on  account  of  the  want  of  certain  necessary  requisites, 
and  also,  through  the  process  of  cooperation,  which 
enables  a  country  to  dispose  of  those  surplus  goods  which 
it  can  produce  most  advantageously  in  exchange  for 
those  which  cannot  be  produced  as  cheaply  as  in  other 
countries.  But  it  does  not  follow  that  because  articles 
can  be  produced  cheaper  in  another  country,  a  given 
country  should  fail  to  manufacture  them;  for  it  is  evi- 
dent that  if  the  prices  of  any  given  four  articles  (A,  B, 
C,  and  D)  are  less  in  Germany  than  the  prices  of  the  same 
four  articles  in  the  United  States,  and  that  prices  of  any 
other  four  articles  (F,  G,  H,  and  I),  are  greater  in  Ger- 


264  ECONOMICS. 

many  than  the  same  four  articles  in  the  United  States, 
Germany  would  not  manufacture  all  of  the  goods  con- 
sumed of  the  first  four  articles  and  the  United  States 
all  of  the  second  four,  although  there  is  a  tendency  that 
way.  The  exportation  of  the  first  four  articles  from  Ger- 
many to  the  United  States  and  the  second  four  from  the 
United  States  to  Germany  would  tend  to  influence  trade. 
The  demand  having  been  satisfied  on  most  articles,  trade 
would  fall  oif ,  while  on  others  it  would  continue  till  the  bal- 
ance of  trade  must  be  paid  in  cash.  When  the  balance  of 
trade  is  paid  in  cash,  this  importation  of  gold  into  the  coun- 
try makes  prices  high,  checks  exports  into  the  country  re- 
ceiving the  gold  balance,  and  increases  the  exports  in  the 
country  sending  it.  The  first  effect  is  a  reduction  of  trade 
in  those  articles  in  which  there  is  a  small  difference  between 
domestic  and  foreign  prices,  while  the  reduction  fails  to 
affect  the  trade  between  those  articles  in  which  there  is 
a  large  difference.  Therefore,  in  the  course  of  trade  it  is 
easily  seen  that  those  commodities  whose  cost  of  produc- 
tion is  very  nearly  the  same  in  the  two  countries  trading 
will  soon  cease  to  be  exported,  while  those  in  which  there  is 
the  greatest  difference  will  continue  to  be  exchanged.  Now 
this  difference  of  cost  of  production  is  largely  owing  to  a 
difference  in  advantages.  It  is  evident  that  a  country 
will  create  and  export  those  goods  which  it  can  most  ad- 
vantageously produce,  or  those  in  which  there  is  for  the 
time  the  largest  difference  in  price  in  the  two  countries. 
Yet,  in  considering  this,  the  real  basis  of  operation  is 
found,  not  in  a  comparison  of  the  difference  of  cost  of 
producing  the  article  in  the  two  countries  respectively,  but 
in  the  relative  cost  of  producing  within  a  given  country  a 


ECONOMICS. 


365 


certain  amount  of  the  articles  for  which  there  is  a  steady 
demand.  In  this  argument  it  is  understood  that  the  price 
of  production  in  a  given  quantity  is  estimated,  as  hitherto 
stated,  by  the  subjective  value;  that  is,  the  demand  or 
marginal  utility.  But  it  is  not  intended  to  go  into  a  dis- 
cussion of  the  theory  of  value,  as  it  is  presented  fully  in 
another  place. 

A  country  may  be  able  to  create  all  of  the  articles 
which  it  imports  from  another  country  more  cheaply  than 
those  same  goods  can  be  created  in  the  country  from  which 
they  are  imported,  but  it  will  not  do  so,  because  it  can 
devote  itself  more  advantageously  to  the  producing  of 
a  few  of  those  articles  in  which  the  price  is  very  different 
between  the  two  countries,  and  exchange  those  for  the 
goods  which  can  be  produced  most  advantageously  in  the 
country  from  which  the  goods  are  imported.  With  our 
present  facilities,  and  without  a  protective  tariff,  we  could 
produce  all  of  our  cotton  and  woolen  goods  in  this  country, 
and  many  of  them  as  cheaply  as  the  imported  goods  plus 
the  transportation.  But  we  can  devote  our  energies  to 
industries  which  yield  us  a  larger  .return,  and  import 
many  of  those  articles  in  which  there  is  a  small  differencf3 
or  no  difference  between  the  cost  of  production  here  and 
in  the  country  from  which  they  are  imported.  It  is  not 
here  intended  to  discuss  the  principle  of  the  development 
of  a  variety  of  resources  of  a  nation  and  the  employment 
of  the  capital  of  a  community  in  different  ways  for  the 
sake  of  the  development  of  the  resources  of  the  nation  and 
the  building  of  national  credit  and  independence  through 
diversified  industries.  Nor  is  it  intended  to  show  the  ad- 
vantages of  free  trade  by  allowing  a  nation  to  do  those 


366  ECONOMICS. 

things  which  it  can  do  most  advantageously.  A  carefully 
administered  tariff  will  observe  this  very  thing,  and  will 
levy  taxes  upon  those  goods  which  may  be  most  advan- 
tageously manufactured  in  other  countries.  Many  persons 
have  drawn  an  important  conclusion  here  in  respect  to 
the  evil  effects  of  the  tariff  in  turning  a  nation  from  a 
natural  channel  of  manufacture  and  trade.  The  evil  lies 
in  the  method  of  managing  the  tariff,  rather  than  in  the 
tariff  as  an  institution.    (See  Book  lY,  ch.  lY.) 

Balance-of-Trade  Theory. 
There  is  a  theory  that  in  trading,  the  nation  which  re- 
ceives the  largest  payment  of  cash  balance  is  really  the 
gainer  in  trade.  This  may  not  necessarily  follow.  It  will 
depend  largely  upon  the  condition  in  which  the  articles 
are  manufactured  and  sold.  A  nation  may  be  importing 
goods  from  another  country  in  such  an  advantageous  man- 
ner to  herself  that  those  goods  are  worth  more  than  cash 
sent  out,  plus  the  cost  of  transportation ;  and  indeed  it  is 
a  supposition  of  trade  that  if  a  man  spends  a  dollar  for  a 
hat,  the  hat  is  of  more  advantage  to  him  than  the  dollar, 
and  what  we  call  wealth  and  the  well-being  of  a  nation 
is  the  goods  that  that  nation  may  import  which  are  of 
greater  service  than  the  money  sent  out.  But  owing  to 
the  fact  that  the  goods  are  yet  to  be  marketed,  and  that 
money  or  cash  is  always  marketed,  and  because  it  takes 
a  sufficient  amount  of  free  capital  to  run  a  business  of 
the  nation,  a  large  and  sudden  exportation  of  gold  in  the 
payment  of  the  balance  of  trade  will  create  alarm  in  the 
minds  of  financiers,  who  see  that  the  means  of  carrying 
on  trade  prosperously  are  being  shortened.     In  reality, 


ECOK^OMICS. 


867 


however,  a  greater  value  has  been  left  in  the  country  in  the 
goods  yet  to  be  marketed. 

Also,  the  old  feeling  that  if  two  nations  trade,  one 
will  lose  and  the  other  gain,  led  us  to  false  notions  of  the 
importance  attached  to  foreign  trade.  The  fact  is,  that 
nations  will  not  trade  with  each  other  unless  it  is  an  ad- 
vantage to  both;  and  they  may  trade  and  both  make  by 
the  transaction,  or  they  may  both  lose  temporarily, — though 
one  cannot  make  and  the  other  lose  perpetually.  We 
should  be  careful  not  to  measure  the  advantages  of  inter- 
national trade  by  the  balance  of  the  imports  over  the  ex- 
ports or  the  excess  of  the  exports  over  the  imports,  for  the 
real  advantages  lie  back  of  these  things  which  are  seen. 
In  the  long  run,  owing  to  the  balance  of  accounts  for  cash, 
the  trade  of  different  countries  balances.  The  old  econo- 
mist's idea  w^as,  that  the  excess  of  exports  over  imports 
represents  the  gain  of  the  nation  in  trade.  The  free- 
trader says  that  the  excess  of  imports  over  exports  repre- 
sents the  nation's  prosperity.  These  statements  are  in  part 
true,  for  balances  represent  only  the  margins  of  trading  in 
the  different  countries.  The  real  advantage,  as  I  have 
stated  above,  is  in  the  fact  that  parties  gain  in  the  transac- 
tion by  having  an  increased  amount  of  wealth  for  con- 
sumption and  utility.  As  Cairnes  says,  "  It  would  be  just 
as  reasonable  to  represent  the  advantages  of  learning  as 
measured  by  the  salaries  of  the  teachers,  as  to  represent 
the  advantages  of  trade  between  two  countries  by  the 
margins  of  profits  of  those  engaged  in  trade." 

In  estimating  the  true  balance  of  trade,  there  are  sev- 
eral things  to  be  considered.  It  must  not  be  limited  to 
the  excess  of  goods  exchanged  for  goods.     The  whole  ac- 


368 


ECONOMICS. 


count  of  debit  and  credit  must  be  shown.  There  is  the 
cost  of  transportation.  The  freight  charges  are  always 
a  burden  of  trade,  and  go  ultimately  to  the  country  that 
furnishes  the  transportation.  This  freight  on  goods  will 
vary  on  different  articles,  being  much  larger  in  proportion 
on  heavy  goods  and  raw  materials  than  on  light  goods  and 
highly  finished  products.  Therefore,  in  estimating  the 
value  of  goods  of  one  kind  or  raw  material  exchanged 
for  goods  of  another  kind,  a  highly  finished  article,  freight 
is  a  great  item  in  showing  a  balance.  Again,  there  are 
several  accounts  which  are  settled  by  international  balance, 
such  as  interest  on  capital  invested,  the  expense  of  for- 
eigners living  in  the  two  countries,  bankers'  commis- 
sions, and  various  other  items.  These  must  of  neces- 
sity be  taken  into  account  before  a  true  estimate  of  the 
balance  of  trade  is  made. 

It  is  easily  seen  that  our  domestic  trade  is  after  all 
of  greater  importance  than  the  foreign  trade,  as  far  as 
national  prosperity  is  concerned.  Hence  it  is  that  while 
the  latter  should  be  encouraged,  nothing  should  be  done 
to  impair  the  former. 

References:  Goschen,  Foreign  Exchanges;  Mill,  International 
Values ;  Bullock,  Introduction  to  Economics. 


ECONOMICS.  369 


CHAPTEE    YII. 

COMMERCIAL  CRISES  AND  PANICS. 

Definitions. 

Commercial  crises,  trade  depressions,  and  panics  are 
terms  used  to  express  short  phases  of  one  great  movement  ] 
and  indeed  are  frequently  used  as  symptoms  of  one  move- 
ment, v^ithout  discrimination.  A  crisis  or  panic  is  a  stop- 
page of  the  movement  of  trade,  during  which  every  one 
wants  to  sell,  nobody  wants  to  buy.  Broadly  stated,  a 
panic  is  due  to  overtrade,  and  its  greatest  condition  is 
the  absence  of  credit.  A  panic  is  a  widespread  loss  of 
credit,  but  sometimes  the  term  commercial  crisis  is  used 
to  cover  the  whole  period  of  depression  of  business.  It 
would  be  better,  scientifically,  to  hold  that  the  term  crisis 
is  simply  a  point  in  the  movement  at  which  a  general 
breakdown  in  business  occurs;  the  panic,  that  which  im- 
mediately follows  a  breakdown ;  and  the  trade  depression, 
that  which  occurs  before  the  crisis,  as  a  cause,  or,  after 
the  panic,  as  a  result.  At  any  rate,  experience  teaches 
us  what  the  thing  itself  is,  although  it  is  difficult  to  reason 
about  it  unless  we  come  to  some  agreement  upon  the  terms 
in  use.  Although  it  is  easy  to  understand  what  a  panic 
is,  to  philosophize  about  it,  to  define  it,  and  to  trace 
out  its  causes  and  effects,  are  certainly  very  difiicult  pro- 
cesses. 

A  commercial  crisis  is  a  sudden  disturbance  in  the 
—24 


370 


ECONOMICS. 


money  market,  and  arises  chiefly  from  loss  of  confidence 
in  the  ability  of  debtors  to  pay.  It  turns  upon  the 
pivot  of  credit,  and  is  immediately  dependent  upon  the 
amount  of  available  cash  for  the  payment  of  obligations. 
The  trade  depression  indicates  that  the  manufacturers 
and  the  producers  have  no  confidence  in  the  ability  of 
the  community  to  absorb  the  manufactured  or  funded 
products  or  raw  materials. 

Trade  depression  always  comes  from  a  failure  of 
production  to  adjust  itself  to  the  conditions  of  consump- 
tion. It  is  sometimes  attributed  to  overtrading  or  over- 
production. Overproduction  is  a  very  indefinite  term  as 
it  is  used  to  express  the  satisfaction  of  general  wants. 
So  far  as  that  is  concerned,  there  is  no  such  thing 
as  overproduction,  for  the  general  wants  of  a  com- 
munity are  never  supplied;  the  desires  always  exceed  the 
means  of  satisfaction.  It  may  be  used  also  from  the  stand- 
point of  the  producer,  who  finds  a  certain  stoppage 
in  the  market  and  more  goods  on  hand  than  he  can  dispose 
of.  He  attributes  it  to  overproduction.  It  may  be  used 
on  the  basis  of  particular  wants  of  the  consumer,  in 
which  he  finds  one  want  relatively  satisfied  while  others 
go  unsatisfied.  The  real  fact  of  the  case  is,  that  under- 
production or  underconsumption  could  be  used  just  as 
well  as  overproduction.  In  the  case  of  underproduction, 
certain  investments  of  capital  and  labor  fail  to  yield  a 
return;  there  being  no  income  from  this  source,  there 
will  be  underconsumption  on  certain  lines  of  goods.  If 
producers  have  thrown  this  class  of  goods  upon  the  market, 
there  will  be  a  glut  in  the  market  and  an  overstocking  of 
the  market,  which  is  usually  termed  overproduction.     It 


ECONOMICS. 


871 


may  be  that  excessive  stimulation  of  certain  industries 
will  throw  a  large  amount  of  goods  on  the  market,  which 
will  make  an  apparent  overproduction,  although  the  real 
situation  in  the  case  is  a  lack  of  normal  consumption. 
This  causes  a  disturbance  in  trade  and  a  general  depres- 
sion of  business.  It  is  rather  an  uneconomical  or  abnor- 
mal distribution  of  products,  labor,  capital,  or  services, 
in  production  and  distribution. 
J 


7  6  S 

Diagram  I. 


4    P    3 


4    ^ 


We  know  that  a  panic  is  a  reaction  after  an  excessive 
hope, — after  speculative  enterprise ;  we  know  that  a  panic 
is  the  result  of  overtrading.  There  is  first  a  speculative 
expansion  of  certain  industries,  not  necessarily  all  indus- 
tries, but  is  an  overproduction  of  those  industries,  which 
results  in  the  fall  of  prices  below  cost.  Then  merchants 
who  are  handling  the  goods  are  unable  to  pay  the  producers 
for  the  stock  already  in  hand,  and  cease  to  order  new 


372 


ECONOMICS. 


goods;  the  producers  in  turn  are  unable  to  pay  the  ad- 
vances made  bj  the  banks,  and  a  failure  of  banks  and 
business  houses  follows;  then  a  general  alarm;  and 
finally,  a  panic. 

Course  of  Trade  in  Depressions. 

This  movement  is  graphically  represented  by  this  dia- 
gram. Suppose  all  of  the  commodities  in  the  market  mak- 
ing up  creative  industry  are  divided  into  ten  groups  in 
proportion  to  their  desirability ;  that  the  greatest  demand 
is  for  group  (10)  and  the  least  for  group  (1).  (See  Dia- 
gram I. )  Now  suppose  there  comes  any  sudden  restriction 
in  demand,  it  will  fall  first  on  the  lower  groups,  (1-A), 
(2-B),  and  (3-C),  and  we  shall  find  that  the  merchants 
are  falling  off  in  their  demand  for  these  commodities  be- 
cause they  have  less  faith  that  the  people  will  absorb  these 
products  of  industry.  There  is  necessarily  a  restriction 
in  production;  profits  are  lower;  some  mills  are  shut 
down,  wages  are  cut  down,  and  there  is  a  lack  of  the 
power  to  exchange  the  goods  manufactured  here  for  goods 
manufactured  in  other  departments.  Thus  people  will 
cease  to  demand,  first,  those  that  are  less  desirable; 
namely,  groups  (4-D),  (5-E),  and  (B-F),  and  thus  man- 
agers of  this  group  will  find  less  demand  for  their  prod- 
ucts. This  shortened  demand  will  again  cause  alarm 
to  merchants,  and  they  will  buy  lesS'  of  the  products  of 
groups  (4-D),  (5-E),  and  (6-F),  and  these  in  turn  must 
follow  the  example  of  the  first  three  groups;  namely, 
shorten  time,  reduce  wages,  and  restrict  consumption, 
and  in  turn  affect  the  groups  above  them,  (7-G),  (8-H), 
and  (9-1),  just  as  they  were  influenced  by  those  below 


ECONOMICS. 


373 


them.  Whatever  the  cause  of  any  sudden  depression,  or 
restriction  of  any  branch  of  industry,  it  works  this  waj 
on  other  branches,  tending  to  depress  them  and  draw  them 
into  the  general  movement  of  depression  and  panic.  It  is 
easy  to  see  that  when  this  decline  extends  throughout  the 
entire  community,  when  there  is  a  fear  of  manufacturers 
that  the  public  will  not  absorb  what  they  are  producing, 
and  a  fear  of  the  traders  that  their  customers  will  not  ab- 
sorb what  they  buy,  aifairs  have  reached  a  critical  point. 
When  business  resumes,  it  is  always  with  the  reverse  of  this 
process,  whether  slow  or  rapid  in  movement:  first  one 
industry,  then  another  starts  up,  giving  confidence  to 
others,  and  gradually  there  is  a  return  to  the  legitimate 
conditions  of  business.  The  lines  xy,  no,  zw  and  pk  re- 
spectively represent  the  progress  of  the  depression. 

Trade  Cycle. 
We  have  observed  how  the  whole  business  world  is  con- 
nected, and  every  part  dependent  upon  every  other  part, 
so  that  the  whole  productive,  distributive  and  consumptive 
enterprises  are  closely  connected.  We  have  also  said  some- 
thing about  the  great  extension  of  credit,  by  which  business 
is  carried  on  with  a  very  small  amount  of  real  capital  in 
sight.  Credit  to  a  large  extent  is  a  psychological  condition 
of  trade,  and  results  of  overstrained  credit  give  rise  to 
psychological  phenomena.  When  business  is  good  and 
everything  moving  in  proper  equilibrium,  credit  begins 
to  expand.  The  result  of  expanding  credit  is  a  larger 
use  of  credit,  the  encouragement  of  more  business  enter- 
prises, a  great  activity  in  trade,  and  gradually  rising 
prices.     These  high  prices  in  turn  promote  stimulative 


374 


ECONOMICS. 


enterprises,  and  these  stimulative  enterprises  tend  to  extend 
credit  still  further,  until  finally,  a  slight  alarm,  a  failure 
and  a  refusal  to  buy,  or  some  other  cause,  precipitates 
a  sudden  panic, — the  bubble  of  trade  is  burst.  First 
comes  speculative  expansion  of  certain  industries ;  second, 
the  excessive  expansion  of  credit;  and  third,  sudden 
change  in  the  demand  for  certain  goods,  which  leads  to 
undue  production  in  one  line  or  stops  production  in  an- 
other line.  This  leads  to  trade  depression  and  crisis, 
which  may  precipitate  a  monetary  panic.    (See  Diagram 

n.) 

An  inflation  of  the  currency  may  to  a  great  extent,  by 
inducing  these  relations  which  I  have  noted,  lead  on  to 
the  conditions  of  a  panic,  and  the  panic  be  precipitated 
by  some  sudden  cause.  Also,  a  sudden  contraction  of  the 
currency,  which  causes  a  scarcity  in  the  money  market, 
may  cause  certain  industries  to  be  cramped  in  their  opera- 
tions, and  lead  on  to  failure  and  a  panicky  condition  of  the 
market.  It  will  be  observed  from  this,  that  the  banking 
system  is  closely  related  to  every  crisis  or  panic  that  has 
ever  occurred;  because  the  banks  in  modern  times  repre- 
sent the  nerve^centers  of  business,  and  through  them  are 
indicated  the  kind,  nature  and  amount  of  business  being 
done  in  the  country.  Without  credit,  banking  itself  cannot 
exist.  If  banks  would  take  in  only  so  much  money  and 
keep  a  reserve  for  every  dollar  taken  in,  there  would  bo 
no  banking.  Consequently,  they  represent  the  centers  of 
credit,  and  are  exceedingly  sensitive  to  any  movement 
in  trade  or  business.  Though  banks  cannot  be  called 
the  causes  of  panics  and  crises,  it  may  be  said  that  illegit- 
imate banking  and  an  improper  extension  of  bank  money 


ECONOMICS. 


376 


have  not  only  brought  about  monetary  panics,  but  have 
intensified  panics  brought  on  by  other  causes. 

.^*<^>-''^  Failures, 


The  trade  cycle. 


W73  4  56789801    Ei456   7fi9-90l    23456789I900IE 

Line  of  business  prosperity,  1873-1900. 
Diagram  II. 


376 


ECONOMICS. 


Mr.  Jevons  has  endeavored  to  show  that  industrial 
crises,  which  often  bring  about  panics  in  the  money  mar- 
ket, occur  in  regular  periods  of  about  ten  and  one-half 
years.  And  he  has  tried  to  show  that  these  are  caused  by 
the  effects  of  the  spots  on  the  sun,  as  they  reappear  in  a 
cycle  of  about  the  same  length.  The  theory  is,  that  varia- 
tions in  the  sun's  heat  and  light  cause  fluctuations  in 
harvest,  'which  affect  the  whole  industrial  world.  Mr. 
Jevons  is  not  conclusive  in  his  own  mind  as  to  the  tena- 
bility  of  his  position,  but  still  makes  a  strong  showing  that 
this  possibility  may  be  the  real  cause  of  the  various  con- 
ditions of  the  market. 

Movement  of  Prices. 

The  movement  of  trade  may  be  recounted  chiefly  in 
two  ways:  one  by  studying  the  movement  of  prices,  and 
the  other  by  observing  the  banking  processes  of  a  nation 
or  of  the  world.  Either  one  is  sufficient  to  give  an  index 
of  the  movement  of  the  volume  of  business.  The  move- 
ment of  prices  in  itself  will  show,  if  we  except  abnormal 
interferences,  approximately  the  exact  condition  which 
the  whole  trade  of  the  world  is  in.  Mr.  Jevons  has 
made  a  careful  investigation  of  this  subject  on  the  basis 
of  the  composite  standard  of  value,  and  the  method  of 
index  numbers.  He  takes  the  number  of  articles  during 
the  years  1845  to  1850,  and,  averaging  the  prices  of  each, 
marks  each  at  100,  to  begin  the  year  1850.  'No  matter 
what  its  unit  is,  whether  it  is  a  yard  or  a  pound  or  a 
bushel,  or  a  ton,  he  marks  it  100.  ]^ow,  as  prices  rise 
above  or  below  this,  a  certain  per  cent,  is  added  to  or  taken 
from  100.    Then  the  percentage  can  be   averaged,   and 


ECONOMICS. 


877 


the  general  movement  of  prices  indicated.  (See  Diagram 
III.)  This  method  of  indexing  prices  is  a  means  of 
determining  the  rise  or  fall  in  money;  thus,  where  the 
standard  of  measurement  is  gold,  the  comparison  of  prices 
of  forty  or  one  hundred  articles  through  a  period  of  years 
will  show  the  rise  or  fall  in  the  purchasing  power  of  gold. 
The  same  may  be  true  of  silver.  We  shall  often  find 
arguments  set  forth  by  which  people  try  to  measure  gold 
with  silver,  saying  that  silver  falls,  but  gold  does  not  fall 
in  price;  while  the  people  on  the  other  side  say  that  gold 
rises,  that  silver  does  not  fall; — when  the  only  true  way 
of  comparison  is  to  measure  the  silver  prices  of  these  100 
articles  and  likewise  the  gold  prices  in  turn.  By  that 
means  you  will  get  the  just  relation  between  gold  and 
silver;  and  it  is  upon  this  basis  that  we  show  that  gold 
has  been  increasing  in  value  during  the  years  1873-96. 
We  shall  see  by  this  chart  that  there  has  been  a  tremendous 
fall  in  prices  since  the  year  1873.'  We  have  come  down 
from  the  position  we  were  in  in  that  period,  step  by  step ; 
and  this  does  not  mean  a  coming  down  from  paper-money 
prices  to  gold  prices.  The  gold  prices  of  all  articles 
the  world  over  have  fallen.  I  say  all  articles, — the  aver- 
age of  all  articles  has  fallen,  because,  owing  to  certain 
excessive  demands  for  an  article  over  and  above  the  sup- 
ply, it  may  rise  to  a  very  high  price  while  other  articles 
remain  low.  But  when  we  come  to  average  them  all, 
we  have  a  rude  approximation,  at  least,  of  the  rise  and  fall 
of  prices.  Men  who  were  in  business  in  the  twenty- 
three  years  from  1873  to  1896  know  how  difficult  it  was 
to  fight  against  this  continual  falling  in  prices.  They 
took  on  a  lot  of  goods  when  prices  were  down,  and  they 


378  ECONOMICS. 

looked  forward  to  tlie  time  when  prices  would  rise,  or 
when  there  should  be  a  movement  or  brisk  trade  in  which 
they  should  realize  good  profits.  But  thej  were  soon 
aware  of  another  downfall  in  prices,  and  though  thej 
bought  at  a  low  figure,  they  found  they  must  sell  at  a 
lower  figure.  Men  bought  land  and  property  upon  this 
basis,  and  lost  all  through  a  gradual  lowering  of  prices. 
We  may  observe  by  Diagram  III  that  there  are  two  kinds 
of  commercial  movements  in  the  world :  the  rotary  move- 
ment, running  through  a  cycle  of  years,  approximately  ten, 
and  the  linear  movement,  in  which  there  is  a  gradual  rise 
or  a  decline  in  prices  or  in  business.  The  shorter  move- 
ment is  called  the  trade  cycle,  and  is  well  illustrated  by 
Diagram  II. 

Warnings  of  an  Approaching  Panic. 

We  have  first  a  symptom  of  an  approaching  panic 
through  the  wonderful  prosperity  indicated  by  numerous 
schemes  and  enterprises  of  all  sorts;  a  general  rise  of 
commodities,  of  lands,  of  houses,  of  property  of  all  kinds ; 
steady  demand  for  workmen;  the  rise  in  salaries  and 
wages ;  a  general  desire  for  speculation  in  order  to  become 
rich  suddenly;  a  public  that  seems  blind  and  easily  de- 
ceived; great  luxury,  leading  to  excessive  expenditures; 
a  hopefulness  that  large  returns  will  be  made  in  all  en- 
terprises. The  banks,  too,  show  a  very  large  amount  of 
discounts  and  loans,  and  ordinarily  a  large  issue  of  bank 
notes,  although  in  recent  times  in  America  the  excessive 
value  of  government  bonds  has  caused  the  retirement  of 
circulation;  and  also  there  is  a  very  small  reserve  in 
specie,  and  deposits  begin  to  grow  small  in  comparison 
with  the  discounts.     Then,   suddenly  some  cause  brings 


1790  1800 

220 


1790  1800  1810  1820  1830  1840  1850 


1865              1870              (875              J880             1885,             189(3             l895              19 

■ 

' 

,. 

- 

P 

A 

O 

/ 

\ 

P 
O 

V 

f 
( 

eraq 

e  of  110  A 

rticles  in  1 

Hamburq. 

^ 

\     P 
\   ^ 

/ 

J 

\y 

220 


1865  1870  1875  1880     ^      1885  1890  «89S  1900 

Opposite  page  378. 


ECONOMICS. 


379 


on  a  crisis :  it  may  be  a  new  tariff  law ;  it  may  be  change, 
or  threat  of  change,  in  the  monetary  system;  it  may  be 
a  hint  that  somebody  is  failing;  it  may  be  a  collapse  of 
some  speculative  scheme  on  the  other  side  of  the  globe  of 
far-reaching  consequences,  which  suddenly  causes  the 
wheels  of  business  to  stand  still.  There  is  a  short  period 
of  what  we  call  the  genuine  panic:  it  is  a  scramble  for 
funds;  a  struggle  to  make  both  ends  of  business  meet; 
a  lack  of  confidence;  a  flurry  in  business, — and  then 
comes  the  dull  period  of  stagnation,  when  there  is  a  lull 
in  the  storm,  and  there  is  virtually  no  business — as  if  each 
man  paused  to  take  a  reckoning,  to  find  his  bearings. 
Then  follows  a  rapid  and  active  liquidation  and  a  steady 
recovery,  or  a  slow  and  painful  liquidation  and  a  recovery 
still  slower.  Finally,  the  last  part  of  the  depression  is 
reached:  loans  and  discounts  are  few;  money  reserve  ac- 
cumulates ;  circulation  is  restricted ;  interest  is  low,  thou- 
sands of  workmen  are  forced  out  of  employment ;  a  cut  in 
wages ;  a  cut  in  salaries ;  prices  of  commodities  fall  very 
low ;  no  confidence  whatever  exists ;  merchants  order  from 
day  to  day,  from  hand  to  mouth  as  it  were ;  factories  run 
on  part  time,  or  stop  entirely;  no  one  dares  to  make  any 
new  ventures  in  business,  and  all  old  business  is  run  at  the 
minimum  rate.  We  observe  also  that  these  conditions  are 
readily  indicated  by  the  balance-sheets  of  banks.  As  a  rule, 
we  may  say  when  prices  are  high  and  discounts  and  loans 
large  in  proportion  to  deposits,  having  steadily  increased 
for  years,  danger  is  not  far  away.  And  again,  when  dis- 
counts and  loans  are  not  only  large  in  proportion  to  de- 
posits, but  have  increased  steadily  for  years,  and  there 
comes  a  sudden  falling-off  for  a  time,  but  to  increase  again 


S80 


ECONOMICS. 


suddenly,  danger  is  apparent.  This  is  the  record  of  the 
banking  balance-sheets  of  the  world  in  their  relations  to 
panics  and  crises. 

Precipitation  of  a  Panic. 

But  when  we  reach  a  point  where  there  is  widespread 
idleness  in  the  country;  when  discounts  and  loans  have 
been  very  much  reduced;  when  bank  reserves  have  been 
greatly  increased;  when  salaries  have  been  decreased,  and 
interest  rates  are  low ;  when  everybody  is  cautious,  stimu- 
lation itself  dead ;  when  expenditures  are  cut  down  to  the 
lowest  possible  notch, — we  are  not  far  away  from  an  im- 
provement in  business.  It  may  come  suddenly,  or  it  may 
be  a  long,  slow  process.  This  period  is  called  that  of 
liquidation  and  recovery.  During  this  period  old  debts 
are  settled;  exchanges  are  made;  either  voluntary  or 
forced  liquidation  takes  place;  loans  are  slowly  extended, 
and  old  business  resumes.  We  reach  then  the  stage  of 
what  we  may  call  confidence,  and  this  growing  confidence 
encourages  new  business ;  and  then  we  enter  a  long  period 
of  what  may  be  termed  prosperity,  lasting  usually  from 
four  to  seven  years.  Wages  and  interest  rise,  and  then 
we  pass  to  the  period  of  extreme  overtrading  and  specu- 
lation, and  discounts  are  large  and  prices  high,  and  an 
over-extension  of  credit  bringing  us  to  the  eve  of  another 
panic.  The  trade  cycle  is  completed.  This  illustration 
is  somewhat  conventional,  yet  in  its  chief  characteristic 
it  is  the  true  trade  movement  that  has  been  going  on  for 
the  last  hundred  years,  and  even  longer.  We  may  notice 
a  graphic  conventionalized  movement  of  trade  in  the 
United  States  from  1873  to  1893.     We  may  see  there, 


ECONOMICS.  381 

beginning  April  1st,  1873,  a  sudden  panic;  a  short  period 
of  stagnation ;  a  long,  slow  period  of  recovery  and  liquida- 
tion; a  rising  and  falling  prosperity,  to  May,  1884;  an- 
other panic,  not  so  severe;  then  stagnation  again,  a  grad- 
ually rising  prosperity  to  October,  1890;  another  sudden 
precipitation,  then  stagnation,  and  finally  a  sudden  start 
upward  to  June,  1893 ;  and  then  a  remarkable  move- 
ment of  prices  downward,  followed  by  rise  of  prices  from 

1896  to  1900. 

Causes  of  Low  Prices. 

But  we  have  said  that  prices  not  only  represent  the 
tendency  of  the  business  world,  but  have  been  in  them- 
selves the  causes  of  crises  and  panics.  But  what  are  the 
causes  of  low  prices  ?  First,  since  1873  at  least,  the  causes 
of  low  prices  have  been  twofold,  namely :  the  increased  fa- 
cilities for  production  of  certain  kinds  of  goods,  and  the  so- 
called  overproduction  of  these  far  beyond  what  the  market 
would  absorb;  second,  the  constant  and  steady  rise  in  the 
price  of  gold, — that  which  measures  the  value  of  all 
articles.  Numerous  economic  writers  have  tried  to  show 
that  the  whole  difficulty  rests  upon  the  fact  of  improved 
machinery  and  new  inventions  and  discoveries,  which 
facilitate  the  rapid  production  of  certain  articles,  and  the 
consequent  fall  of  their  value.  To  a  large  extent  this 
has  been  true,  for  indeed  we  witness  in  the  production  of 
iron  in  all  forms,  in  the  production  of  copper,  in  the  pro- 
duction of  aluminum,  a  rapid  and  sudden  fall  of  prices 
which  can  be  accounted  for  in  no  other  way  than  that  of 
improved  processes.  But  when  we  come  to  take  an  average 
of  all  prices  of  all  goods,  then  we  see  an  average  fall,  and 
wo  come  to  the  conclusion  that  there  must  be  some  other 


382  ECONOMICS. 

influence  at  work,  which  could  be  only  the  sudden  rise  in 
the  value  of  gold.  For,  indeed,  were  things  properly  ad- 
justed, were  everybody's  needs  supplied,  everybody's  de- 
sire fulfilled,  there  w^ould  be  no  such  thing  as  overproduc- 
tion nor  a  general  business  failure;  for  there  would  be 
goods  to  exchange  for  all  goods.  Yet  the  influence  of  any 
given  industry  is  far-reaching  and  wide-extended  in  rela- 
tion to  other  industries,  and  the  failure  of  one  may 
bring  an  overstrained  condition  of  affairs  and  lead  to  de- 
pression in  others,  which  in  turn  may  lead  on  to  panics, 
and  loss  of  confidence  in  trade. 

Protective  Tariff  and  Panics. 
Fundamentally,  protective  tariffs  are  not  the  cause  of 
panics,  though  they  may  help  to  precipitate  them.  Any 
sudden  tariff  changes  will  in  their  arbitrary  interferences 
with  the  laws  of  trade  have  a  tendency  to  create  an  un- 
settled condition  of  affairs,  lead  to  trade  depression,  and, 
if  the  market  is  over-sensitive,  to  a  crisis  and  panic.  The 
history  of  our  own  country  shows  that  this  is  true.  On  the 
other  hand,  where  there  have  been  slow  changes  in  the 
tariff  there  has  been  no  real  detrimental  effect  upon  busi- 
ness. We  find,  top,  that  panics  come  and  go,  whether  we 
have  high  tariff,  low  tariff,  or  free  trade.  The  panic  of 
1857  was  caused  by  over-activity  in  trade,  excessive  specu- 
lation, over-banking.  Immediately,  in  the  same  year,  a 
tariff  was  framed  to  held  avert  the  threatened  panic.  But 
it  had  a  contrary  effect;  it  unsettled  rates  of  goods  when 
prices  were  already  unstable,  and  intensified  the  panic  by 
throwing  certain  industries  into  confusion.  It  will  be 
noticed  in  this  that  all  the  conditions  of  a  panic  were  evi- 


ECONOMICS. 


883 


dent  before  the  tariff  bill  was  formed;  all  it  did  was  to 
intensify  the  evil,  rather  than  restrict  it.  Again,  the 
tariff  of  1846,  which  was  called  a  revenue  tariff,  being  a 
reduction  from  the  old  tariff  of  1842,  brought  about  va- 
rious changes.  In  the  attempt  of  the  people  to  readjust 
themselves  to  the  changed  conditions,  the  causes  of  the 
panic  of  1848,  which  followed,  were  intensified;  but  it  was 
of  short  duration,  and  the  upward  movement  started  again 
in  the  following  year,  1849.  The  results  of  the  reduced 
tariff  of  1872,  and  of  the  increased  tariff  of  1883,  and  of 
the  McKinley  bill  of  1890,  are  readily  observed.  In  each 
case  they  failed  to  bring  steadiness  to  the  market. 

You  will  observe  that  the  panics  occurred  immediately 
after  these  great  changes.  The  tariff  law  of  1872  and  the 
panic  of  1873,  the  tariff  law  of  1883  and  the  panic  of 
1884,  the  McKinley  bill  and  the  panic  of  1890,  and  the 
Wilson  bill  and  the  panic  of  1893,  came  together.  'Now 
we  must  not  infer,  because  all  these  occur  together,  that 
they  stand  in  the  relation  of  cause  and  effect,  for  fre- 
quently the  panic  has  been  the  cause  of  the  tinkering  with 
the  tariff.  But  the  tinkering  with  the  tariff  to  modify 
the  condition  of  panics  has  been  generally  a  detriment  to 
the  whole  community.  Without  doubt  the  McKinley  bill 
induced  a  great  deal  of  buying  from  European  markets, 
and  overstocked  our  own,  prior  to  the  enforcement  of  the 
high  tariff  on  certain  lines  of  goods.  These  lines  of  goods 
became  cheap,  business  dull ;  and  it  would  not  do  to  infer 
that  this  McKinley  bill  was  a  fundamental  cause,  or  indeed 
a  cause,  of  the  panic  of  1890,  although  it  intensified  the 
depression.  It  is  impossible  to  deny  from  any  historical 
standpoint,  that  the  Wilson  tariff  law  had  a  very  potent 


384 


ECONOMICS. 


influence  in  intensifying  the  evil  results  of  the  panic  of 
1893. 

History  of  Panics  in  the  United  States. 

It  will  be  impossible  for  me  to  give  a  complete  bistory 
of  the  panics  in  the  United  States,  but  I  will  refer  rather 
specifically  to  our  business  course  since  1873,  for  it  is  from 
this  point  that  the  financial  troubles  of  '93- 96  really  date. 
At  the  close  of  the  civil  war  we  were  still  in  the  paper- 
money  era,  which  had  served  to  greatly  inflate  local  prices. 
Also,  special  lines  of  manufacture  had  reached  a  high  grade 
of  development,  and  at  the  close  of  the  war  a  large  number 
of  men  turned  their  mental  and  physical  energies  to  the 
development  of  the  resources  of  the  country.  The  result 
was  a  rapid  and  somewhat  fictitious  movement  in  business ; 
and  I  may  say  here,  that  the  difiiculty  with  rapid  move- 
ments in  business  is,  that  the  different  parts  of  the  busi- 
ness world  do  not  have  time  to  readjust  themselves  to  the 
new  conditions,  and  the  result  is  weakness  and  failure 
on  the  part  of  some,  which  tend  in  turn  to  break  down 
others.  There  was  considerable  movement,  too,  in  the 
speculative  market.  The  railroad-building  which  had 
begun  so  vigorously  in  the  latter  period  of  the  sixties  was 
continued  along  into  1873  with  great  rapidity.  In  that 
year  4,190  miles  of  road  were  built,  at  a  cost  of  $121,- 
000,000;  or  in  the  period  of  1868  to  1873,  railroads  were 
built  at  a  total  cost  of  $1,700,000,000.  This  absorbed  a 
vast  deal  of  capital  of  the  country,  and  led  to  an  over- 
strained condition  of  business.  A  gradual  return  to  specie 
payments  tended  to  a  shrinkage  in  prices,  and  there  was 
a  decided  depression  in  the  money  market  in  ISTovember 
and  December  of  1872.    During  this  period  the  lowest  rate 


Ecoi^roMics.  385 

of  discount  was  7  per  cent.,  and  in  December  it  was  quoted 
at  1-32  of  1  per  cent,  to  1-4  of  1  per  cent,  a  day.  People 
entered  the  new  year  with  a  hope  of  a  return  of  better 
limes;  the  interest  declined  a  little,  to  six  or  seven  per 
cent.  Soon  the  old  rate  of  1-32  of  1  per  cent,  a  day  reap- 
peared, and  continued  to  the  month  of  May.  By  April 
the  air  was  full  of  the  symptoms  of  a  panic,  which  was 
precipitated  by  the  15th  of  April.  There  was  a  slight  re- 
covery in  May,  but  a  severe  relapse  in  September.  The  de- 
mand for  money  was  excessive;  it  could  not  be  had  at 
any  price;  some  few  loans  were  made  on  the  culminating 
day  at  1  1-2  per  cent,  a  day.  In  September  the  panic 
broke  forth  under  the  notorious  failure  of  Jay  Cooke.  It 
was  a  miserable  year,  during  which  prices  were  excessively 
high  in  all  branches  of  business.  Loans  which  had  been 
made  for  completing  railroads  followed  one  another  so 
rapidly  and  created  such  a  demand  for  money,  that  from 
the  month  of  October,  1871,  to  the  month  of  May,  1873, 
they  could  not  be  placed  at  a  lower  rate  than  seven  per  cent, 
interest;  and  the  issue  of  railroad  securities  became  so 
unsalable  that  bankers  succumbed  beneath  the  burden. 
This  was  a  great  misfortune  to  all  the  railroads.  In  the 
commercial  world  affairs  were  not  so  bad  as  was  feared. 
On  the  20th  day  of  September,  for  the  first  time,  the  Stock 
Exchange  of  'New  York  city  was  closed  for  ten  days, 
during  which  legal-tender  notes  were  at  a  premium  of  1-4 
per  cent,  to  3  per  cent,  above  certified  checks.  On  the 
18th  there  was  a  run  on  the  deposits,  continuing  on  the 
19th  and  20th,  especially  by  the  country  banks  and  the 

bank  correspondents.    No  security  could  be  realized  upon, 
—25 


386  ECONOMICS. 

and  in  order  to  relieve  the  situation  the  Secretary  of  the 
Treasury  bought  $13,500,000  of  national  5-20  bonds,  stat- 
ing that  he  could  do  no  more.  The  banks  finally  passed 
their  most  critical  period  October  14th,  when  out  of  $32,- 
218,000  legal-tender  dollars  at  the  beginning  of  the  panic, 
only  $5,800,000  remained  on  hand.  It  was  not  until  the 
month  of  N^ovember  that  the  decline  stopped,  and  a  slight 
advance  began  to  take  place.  Throughout  the  entire  panic, 
the  bank  reserves  were  much  below  the  legal  requirements 
of  25  per  cent.  The  New  York  Clearing  House  came  for- 
ward and  issued  clearing-house  certificates  to  the  amount 
of  $26,565,000,  and  made  a  common  fund  of  legal  tenders 
belonging  to  the  associated  banks  for  mutual  aid  and  pro; 
tection.  It  is  thought  that  this  measure  prevented  a  great 
disaster.  Discounts,  which  were  $309,000,000  in  Sep- 
tember, 1871,  had  fallen  to  $278,000,000  in  September, 
1873,  on  the  eve  of  the  panic,  and  they  were  finally  re- 
duced to  $250,000,000.  Deposits,  which  were  $248,000,- 
000  in  July,  1871,  fell  to  $198,000,000  in  September, 
1873.  At  the  last  point  of  the  panic,  when  suspension 
was  universal,  deposits  had  declined  to  $89,000,000. 
Great  speculators,  with  Vanderbilt  at  the  head,  formed  a 
syndicate  and  made  prices  to  suit  themselves;  but  the 
death  of  Mr.  Clark,  in  June,  and  the  failure  of  George 
Bird  Grinnell,  brought  about  its  dissolution,  and  the 
liquidation  of  this  great  concern  kept  down  prices  for  a 
long  time.  Then  followed  a  long  period  of  gradual  recov- 
ery of  business,  and  slow  liquidation.  By  1878,  confi- 
dence was  restored,  and  in  1879  business  was  again  flour- 
ishing. From  1879  to  1884  were  ^ve  years  of  great 
prosperity.     The  last  date  terminates  the  history  of  the 


ECONOMICS. 


ssr 


prosperity  period,   and  marks   the  beginning   of   a  new 
crisis. 

During  this  period,  the  most  gigantic  speculations  in 
railroads  had  occurred.  The  zenith  of  the  movement  was 
in  1880,  which  was  followed  by  a  slight  retrograde  move- 
ment after  three  years  marked  by  declining  prices.  The 
cause  was  the  extensive  building  of  new  lines  of  railroads, 
the  necessity  of  lowering  rates,  and  the  manipulation 
of  railroading  by  the  managers  on  a  great  speculative 
scheme.  In  May,  1884,  the  storm  burst  upon  the  business 
world,  and  several  houses  went  down.  Then  followed  the 
suspension  of  banks,  beginning  with  the  Marine  Bank  on 
May  5th,  and  the  Metropolitan  a  week  later,  with  a  large 
number  of  banks  and  houses  of  the  second  order  following 
in  its  train.  The  banks  and  the  Clearing  House  were  the 
first  to  be  attacked,  but  they  formed  themselves  into  a 
syndicate  to  resist' the  storm  which  was  causing  failure 
all  around  them.  Checks  were  no  longer  paid,  and  set- 
tlements no  longer  took  place;  consequently,  credit  circu- 
lation was  suspended.  Clearing-House  certificates  again 
availed  to  settle  trade  balances.  In  the  industrial  world 
we  find  that  1883  was  disturbed  by  numerous  failures. 
Though  there  had  been  no  sudden  decline  in  prices, 
they  c<Duld  scarcely  be  held  in  their  places,  and  just  before 
the  breaking-out  of  the  panic  there  was  great  complaint 
of  the  accumulation  of  goods  in  the  warehouses  and  the 
difficulty  of  making  exports.  Gold  flowed  away  from  the 
coffers  of  the  country,  and  cash  on  hand  decreased  each 
day.  On  the  first  day  of  January,  1884,  by  the  order 
of  the  court,  the  New  York  &  New  England  Railway  was 
placed  in  the  hands  of  a  receiver.    The  North  Eiver  Com- 


388  ECONOMICS. 

pany  followed  soon  after,  on  the  12tli  of  January.  Many 
houses  exhibited  their  balance-sheets.  On  May  Gth  the 
^National  Marine  Bank  failed,  and  then  the  house  of  Grant 
&  Ward,  which  went  down  with  a  liability  of  $17,000,000. 
On  the  13th  of  May  the  president  of  the  Second 
I^ational  Bank  of  l^ew  York  was  forced  to  suspend 
payment,  with  a  liability  of  $3,000,000.  It  was  the 
final  blow  to  credit;  exchange  became  impossible.  Trade 
operations  were  suspended;  securities  were  plenty,  but 
money  was  lacking.  The  rate  of  discounts  and  loans 
rose  to  4  per  cent,  a  day,  in  the  worst  period  of  the 
panic.  Xo  ready  money  could  be  counted  on  by  anyone 
at  any  time ;  offerings  were  made  upon  the  stock  exchange, 
with  no  takers  at  any  price ;  everything  was  disorder  and 
confusion;  houses  and  banks  continued  to  go  down  in  the 
midst  of  a  great  tumult.  It  was  not  until  the  banks  and 
the  Clearing  House  formed  a  syndicate  that  things  began 
to  settle  down  and  distrust  to  diminish.  Finally,  a  rise 
in  the  discount  rate  attracted  foreign  capital  little  by 
little,  and  exchange  grew  easier.  With  the  help  of  the 
syndicate  a  good  credit  was  established,  and  the  rate  of 
discount  declined  to  5  per  cent.  This  panic  was  general 
throughout  the  United  States,  but  it  was  rather  a  panic 
of  securities,  than  an  industrial  crisis.  People  had  failed 
to  observe  the  slowly  declining  prices  from  1882  to  1884, 
and  were  unprepared  for  the  storm  which  burst  upon 
them.  The  panic  in  Europe  in  1882  had  checked  the  rise 
of  prices  and  started  their  decline,  so  that  the  storm  was 
really  gathered  two  years  before  it  burst.  One  of  the 
fundamental  causes  of  the  precipitation  of  this  panic  was, 
that  the  banks  had  made  immense  loans  on  the  shares  of 


ECONOMICS.  389 

the  new  railroad  issues,  in  order  to  advance  the  prices  on 
the  stock  exchange.  Just  at  this  juncture,  the  railroad 
earnings,  instead  of  increasing,  showed  a  weakness  and 
suffered  a  slight  reaction ;  and  as  soon  as  these  artificially 
maintained  quotations  began  to  drop  a  little,  everything 
became  unsalable  and  the  whole  edifice  crumbled.  Up  to 
this  time  excitement  had  prevailed,  and  the  rising  in 
prices  had  caused  every  one  to  buy.  The  moment  the 
advance  was  arrested,  everybody  reversed  his  determina- 
tion, and  wanted  to  sell.  Bankers  had  invested  not  only 
their  capital,  but  some  of  their  clients'  deposits;  and  all 
the  brokers  were  interested  in  the  speculation  which 
brought  them  business  and  kept  things  booming  until  the 
collapse  came  and  business  ruin  followed.  But  low  prices, 
and  the  outlook  for  a  fine  harvest,  gave  courage;  con- 
fidence began  to  be  restored,  and  a  resumption  of  business 
followed.  It  was  not  long  before  the  normal  state  of  busi- 
ness returned. 

Business  continued  to  advance  until  1888.  This  was  a 
prosperous  year,  although  securities  became  heavy  and  a 
general  depression  in  business  followed,  and  some  stocks 
shrank  immediately.  There  came  however  a  sharp  specu- 
lation in  wheat;  copper  had  declined  to  a  large  extent; 
and  the  French  copper  syndicate,  holding  up  the  prices 
for  a  time,  finally  collapsed,  and  caused  a  certain  fluctua- 
tion in  business.  Crops  were  large,  with  the  exception  of 
wheat;  the  cotton  manufacturing  was  extensive.  There 
was  a  slight  decline  in  the  pig-iron  production;  decline  in 
the  production  of  petroleum,  by  agreement;  and  a  heavy 
one  in  Bessemer  iron.  There  was  a  large  export  movement 
in  1889  in  cotton,  the  greatest  since  1880.    The  new  tariff, 


390  ECONOMICS. 

which  came  into  operation  in  1890,  introduced  a  large  im- 
port of  goods.  The  volume  of  business  in  1889  was  the 
greatest  ever  known  in  the  history  of  the  country.  Rail- 
road earnings  showed  a  wonderful  recovery,  and  many  re- 
ports gave  the  largest  figures  ever  recorded  in  this  business. 
There  was  plenty  of  work ;  good  wages,  fair  prices.  ISTever- 
theless,  there  were  indications  of  a  coming  depression.  In 
the  middle  West  the  farm-mortgage  pressure  was  excessive. 
There  was  a  decline  in  the  anthracite-coal  production ; 
there  were  low  prices  for  corn  and  oats ;  speculations,  too, 
were  growing  smaller.  The  bank  reserves  were  getting 
low  towards  the  last  part  of  the  year,  and  there  was  a  heavy 
absorption  of  investment  securities;  a  large  amount  of 
gold — more  than  $37,000,000 — was  exported  in  the  first 
six  months  of  the  year ;  failures  were  becoming  numerous, 
exceeding  those  of  1888  by  203 ;  there  was  a  bad  decline  in 
the  woolen  trade;  the  importations  surpassed  all  previous 
years,  and  the  net  export  of  gold  amounted  to  nearly  $40,- 
000,000.  Unused  deposits,  capital  surplus  and  undivided 
profits  were  getting  very  small  in  the  banks  in  comparison 
with  the  large  number  of  loans  and  discounts  shown  at  the 
end  of  the  year.  A  close  work  in  banking  began,  while 
the  demand  in  the  South  and  West  for  currency  was  very 
great.  It  was  in  this  condition  that  the  year  1890  opened, 
with  a  constant  pressure  for  bank  accommodations.  There 
was  an  excessive  volume  of  transactions  of  all  kinds,  but 
there  was  not  enough  money  to  keep  up  with  the  overtrad- 
ing. The  Secretary  of  the  Treasury  threw  a  million  dol- 
lars a  day  into  the  market  for  a  period  of  seventy  days,  for 
the  purchase  of  government  bonds.  The  railroad  mag- 
nates met  and  tried  to  sustain  the  price  of  railroad  securi- 


ECONOMICS. 


391 


ties  against  an  oversupply  of  them.  These  two  move- 
ments only  delayed  the  coming  crisis.  The  debates  on  the 
silver  question  led  to  false  hopes  of  cheap  money,  and  made 
a  delusive  shrinkage  on  account  of  the  promise  of  high 
prices,  and  led  to  speculation.  The  Buenos  Ayres  crisis 
created  a  great  demand  for  money  in  England,  and  Eng- 
land sold  her  securities  in  our  market,  taking  gold  therefor. 
Although  we  had  a  large  cotton  crop,  the  oats,  wheat  and 
corn  crops  were  small.  Failures  began  to  appear  in  J^ew 
York,  and  the  embarrassment  of  the  Baring  Bros,  in  Eng- 
land intensified  the  panicky  condition  of  affairs.  Eail- 
road-building  had  increased  to  a  large  extent,  6,081  miles 
being  laid  in  this  year,  and  the  new  securities  were 
barely  absorbed.  This  had  a  tendency  to  depress  the  mar- 
ket. The  huge  imports  to  take  advantage  of  old  tariff 
rates  absorbed  a  vast  deal  of  money.  The  silver  bill  cre- 
ated some  distrust  abroad,  which  made  a  decline  of  $123,- 
000,000  in  circulation  and  in  specie  reserve  of  $178,000,- 
000.  Discounts  and  loans  rose  to  $1,932,000,000.  The 
panic  was  of  short  duration,  and  the  following  year 
liquidation  and  recovery  took  place,  confidence  was  re- 
stored, prices  began  to  advance,  and  there  was  a  feeling 
of  general  prosperity. 

In  1892  we  had  a  fair  business  year,  and  the  year  1893 
began  favorably.  But,  in  the  midst  of  the  apparently 
favorable  condition  of  affairs,  a  sudden  panic  burst  upon 
the  people.  The  great  cause  of  this  panic  of  1893  arose 
from  the  fact  that  there  was  an  imperfect  liquidation  after 
the  panic  of  1890, — for  there  is  no  sure  return  to  business 
prosperity  until  liquidation  takes  place.  It  was  not  thor- 
ough in  its  process,  consequently  a  relapse  took  place,  and 


392 


ECONOMICS. 


the  relapse  proved  worse  than  the  original  disease.  The 
movement  Avas  precipitated  before  its  natural  time,  on  ac- 
count of  the  influence  of  Argentine  and  the  Barings ;  but 
it  was  arrested  on  account  of  other  influences,  such  as 
large  crops  and  favorable  condition  of  manufactures.  It 
was  again  suddenly  precipitated  on  account  of  the  scar- 
city of  money,  excessive  rise  in  gold,  and  the  continual  fall 
in  prices.  The  suspension  of  free  coinage  in  India  intensi- 
fied the  importance  of  our  own  silver  question  in  America, 
as  did  the  unrest  and  discontent  engendered  by  the  threat- 
ened sudden  and  radical  change  in  the  McKinley  tariff  law. 
In  all  this  must  not  be  ignored  the  fact  that  in  certain  in- 
dustries there  was  a  stimulation  of  production  clear  beyond 
the  ability  of  the  other  portions  of  the  world  to  absorb. 

Management  and  Prevention  oi  Panics. 
Enough  has  been  said  to  show  the  nature  of  panics,  and 
to  reveal  their  causes.  Is  it  possible  to  remedy  them 
when  they  are  once  upon  us  ?  The  Bank  of  England  has 
a  way  of  discouraging  excessive  borrowing,  by  raising  the 
rate  of  discount.  In  the  United  States  we  have  no  such 
plan,  except  as  it  occurs  through  natural  laws.  If  the 
Bank  of  England  fails  to  discourage  excessive  extension 
of  credit,  it  simply  by  permission  issues  a  large  amount 
beyond  the  bullion  reserve;  that  is,  notes  are  issued  on 
other  securities.  This  gives  the  bank  reserves  or  supplies 
the  outside  demand.  There  are  only  two  ways  to  make 
a  panic  subside:  one  is  to  lessen  the  demand  for  credit, 
the  other  to  increase  its  supply.  Both  should  be  tried 
in  every  way.  We  have  seen  that  the  'Ne^Y  York  banks 
combine  their  reserves  and  issue  clearing-house  certificate;^. 


ECONOMICS.  393 

so  that  tliey  stand  together.  The  government  has  fre- 
quently relieved  the  pressure  by  the  purchase  of  govern- 
ment bonds.  If  all  banks  would  pay  out  as  fast  as  possible 
they  would  be  able  to  turn  the  tide  of  a  panic,  provided 
that  they  were  all  united  in  one  system. 

But  the  prevention  of  the  occurrence  of  panics  and  in- 
dustrial crises  is  a  much  more  difficult  matter.  If  we 
should  agree  with  the  theory  of  Mr.  Jevons,  that  they 
are  caused  by  the  sun-spots,  then  how  shall  we  regulate 
the  sun?  Or  if  we  conclude  that  they  have  deep-seated 
causes  resting  in  the  nature  of  modern  organized  society, 
how  shall  we  change  the  organization  of  society?  Crises 
have  been  classified  as  credit  panics,  capital  panics,  and 
panics  of  circulation.  If  the  credit  system  is  responsible 
for  these  business  diseases,  how  shall  the  credit  system 
be  improved?  Delicate  and  sensitive  as  it  may  be,  I  am 
convinced  that  improvements  might  be  made  in  our  credit 
system  so  that  it  may  be  more  stable  and  uniform  and 
be  open  to  fewer  irregularities.  Our  banking  systems 
are  far  from  being  perfect.  They  may  be  greatly  im- 
proved. In  case  of  a  defective  circulation,  it  is  believed 
that  the  nations  of  the  world  could  make  a  currency  which 
would  be  more  stable  and  cause  less  fluctuation  in  the 
market,  and  in  most  cases  the  circulating  medium  of  most 
governments  could  be  greatly  improved.  As  to  the  great 
lack  of  capital  causing  panics  and  depression,  there  seems 
to  be  no  real  remedy  for  that  except  in  a  decline  of  the 
speculative  spirit.  A  slight  remodeling  of  human  nature 
— who  will  undertake  the  task,  so  that  there  will  be  less 
capital  destroyed  in  speculative  enterprises  induced  by 
people  who  have  great  hope  of  sudden  wealth?     Millions 


394  ECONOMICS. 

are  sunk  every  year  that  yield  no  return.  If  we  do  not 
want  sudden  downfalls,  we  must  be  contented  with  a 
slower  pace,  with  smaller  margins  and  less  business, 
on  a  surer  foundation.  But  if  we  consider  industrial 
crises  in  the  scientific  sense,  we  enter  a  still  more  diffi- 
cult field.  The  foundation  of  specialized  or  capitalistic 
production  is  touched  in  the  consideration  of  the  causes  or 
the  prevention  of  these  recurring  industrial  phenomena. 
Mr.  Giffen  asks  the  question,  ^'Why  is  trade  depressed?" 
Should  not  the  question  rather  be,  "Why  is  trade  ever 
prosperous?  To  keep  in  full  employment  the  compli- 
cated machinery  of  a  highly  complicated  industrial  com- 
munity like  that  of  England;  to  have  matters  so  ordered 
that  at  a  given  time  there  is  an  excessive  demand  for 
labor  and  capital  in  all  branches  of  industry,  and  hardly 
any  individual  willing  to  work,  in  fact  goes  without  em- 
ployment; and  to  have  all  of  this  accomplished  by  volun- 
tary association  and  competition  among  the  units  with 
which  society  is  composed,  each  pursuing  his  own  interest, 
and  laboring  to  produce  what  he  believes  other  people  will 
buy,  19  surely  a  miracle  so  astounding  as  to  excite  per- 
petual surprise  that  it  should  be  performed.''  He  says 
that  "the  marvel  is  not  at  all  diminished  by  the  fact  that 
under  no  other  conceivable  system,  socialistic  or  other, 
could  the  same  results  be  achieved."  In  a  less  complicated 
system  a  depression  in  business  is  no  marvel.  Take  an 
agricultural  community,  and  one  single  failure  in  crops 
is  sufficient  to  produce  depression,  and  in  olden  times  a 
famine.  About  forty-eight  years  ago  Ireland  had  a  bad 
harvest,  which  produced  a  famine  of  the  old  style.  But 
when  society  is  wholly  tied  together  through  a  varied  and 


ECOiTOMics.  396 

complicated  industry,  a  bad  harvest,  though  less  radical 
in  its  results,  has  its  effects  all  along  the  line  of  competi- 
tive industry.  And  the  slightest  decline  from  the  maxi- 
mum price  sets  up  an  outcry  about  depression.  It  has  been 
stated  with  some  truth,  that  it  frequently  occurs  that 
when  people  complain  the  most,  times  are  really  the  best 
when  considering  the  ultimate  good  to  society.  Grind- 
ing economy,  shortened  income,  loss  of  property  and  fail- 
ure may  not  be  comfortable  things  to  think  of  in  a  per- 
sonal way,  but  society  at  large  is  learning  the  rough  lessons 
of  experience. 

References:  Max  Wirth,  Handelnskreisen ;  Juglar,  A  Brief  His- 
tory of  Panics;  Walker,  Political  Economy;  Jones,  E.  D.,  Economic 

Crises. 


396 


ECONOMICS. 


CHAPTEK  VIII. 
SPECULATION. 

Compensation  for  Risk. 

Every  business  enterprise  involving  capital,  labor  or 
land  is  accompanied  with  more  or  less  risk.  The  modern 
system,  by  which  the  estimated  wants  of  a  community  are 
determined  by  business  managers,  in  itself  involves  risk. 
There  is  an  estimate  of  the  kind,  quality  and  amount  of 
goods  demanded  by  the  people.  If  the  manufacturer  fails 
in  his  estimate,  and  produces  a  kind  of  goods  which  has 
been  superseded  by  something  else  or  has  been  superseded 
by  goods  of  a  different  quality,  his  goods  fall  upon  the 
market  untouched,  and  there  will  be  an  insufficient  amount 
of  returns  to  the  business  to  pay  the  interest  on  capital 
and  the  wages  of  labor,  and  he  will  get  nothing  for  his 
risk.  Also,  if  a  manufacturer  overestimates  the  market 
and  creates  more  goods  than  are  readily  absorbed,  he  may 
for  a  time  feel  the  depression;  and  if  those  goods  are  in 
turn  superseded,  the  market  will  not  be  able  to  absorb  the 
entire  stock. 

It  is  sometimes  said  that  even  the  farmer  takes  a  risk 
when  he  tills  the  soil,  for  he  must  be  dependent  upon  the 
climate  for  his  success  in  the  enterprise.  It  is  true  of 
every  legitimate  business  involving  the  various  factors  of 
production.  But  more  especially  is  this  observable  in 
trade,  for  the  tradesman  must  make  a  careful  estimate 
of  the  needs  of  the  community,  and  also  of  the  amount 


ECONOMICS. 


S97 


of  each  kind  of  goods  that  it  is  likely  to  absorb  within 
a  given  time.  If  he  fail  in  this  estimate  the  tradesman 
will  find  it  difficult  to  satisfy  the  demands  of  his  own 
business,  and  consequently  will  not  have  sufficient  income 
to  pay  interest,  rent,  labor,  etc.  This  principle  explains 
very  clearly  why  it  is  that  the  profits  of  both  the  manu- 
facturer and  tradesman  appear  to  be  so  high:  it  is  a 
reward  for  risk,  and,  owing  to  this,  the  nominal  profits 
must  be  estimated  very  high. 

N^ow  there  are  two  reasons  why  so  many  failures  occur 
in  business  along  this  line:  first,  because  business  mana- 
gers are  not  capable  of  estimating  the  market;  and,  sec- 
ond, they  are  unable  to  realize  high  enough  profits  to 
cover  this  element  of  risk, — therefore  the  weak  members 
of  the  so-called  business  fraternity  fail  while  the  stronger 
survive.  It  might  be  said  incidentally,  that  this  is  one 
reason  for  the  great  concentration  of  wealth  under  our 
present  system.  People  see  in  it  the  avarice  and  greed 
of  certain  individuals  who  seek  to  destroy  others  in  busi- 
ness. In  the  open  market  it  is  to  a  large  extent  the  sur- 
vival of  the  fittest;  and  as  the  number  of  the  unfit  to 
do  business  is  very  large,  it  is  quite  in  keeping  with  the 
speculative  system  that  thousands  should  fail  in  their 
enterprises.  It  will  be  found,  also,  that  those  persons  who 
do  succeed  are  those  who  are  willing  to  sacrifice  their 
own  comforts  in  life  by  saving  to  gratify  their  ambition. 
It  is  ambition  for  wealth  and  power  that  really  makes  a 
very  strong  element  in  the  creation  of  their  fortunes ;  and 
this,  coupled  with  the  idea  of  business  capacity  on  the 
one  hand  and  the  large  compensation  necessary  to  be  set 


398  ECONOMICS. 

aside  for  risk  on  the  other,  makes  this  inequality  of 
wealth  in  the  community.  If  it  is  necessary  to  have  a 
large  compensation  for  risk  and  a  certain  man  succeeds, 
then  his  wealth  accumulates  rapidly;  and  if  he  succeeds 
once  where  others  fail,  his  opportunities  for  success  are 
multiplied. 

It  is  idle  to  argue  that  because  all  business  is  accom- 
panied by  risk,  all  speculative  enterprises  are  legiti- 
mate, for  if  too  much  risk  is  taken  we  find  a  tendency 
to  create  fictitious  values;  so  that  when  speculation  is 
carried  to  an  excessive  extent  it  becomes  nothing  more 
than  a  kind  of  gambling.  'Now  the  difference  between 
gambling  and  real  business  is  not  easy  to  determine. 

Le^timate  and  Illegitimate  Speculation. 

It  is  difficult  to  say  where  speculation  passes  into 
gambling,  for  the  reason  that  a  line  cannot  be  drawn 
determining  how  much  risk  should  be  taken  in  business. 
There  is,  however,  a  clearly  marked  species  of  specula- 
tion which  can  be  classified  as  gambling.  Gambling  is 
in  itself  a  process  of  distribution;  it  is  an  economic 
category  of  fortune.  Two  men  sit  down  at  a  table  before 
a  pile  of  gold.  By  the  manipulation  of  cards  with  skill 
or  trickery  or  fraud,  one  obtains  the  gold  and  the  other 
loses  it.  All  that  trade  which  tries  to  get  a  share  of  the 
product  of  industry  without  rendering  any  definite  service 
to  human  society  may  be  called  illegitimate  speculation, 
and  is  analogous  to  gambling.  Where  people  attempt  to 
manipulate  the  market  by  forcing  prices  up  or  forcing 
them  down,  where  they  attempt  to  make  "corners"  in  the 
market  or  by  monopoly  power  seize  excessive  margins, 


ECONOMICS. 


399 


it  is  nothing  more  than  the  exploitation  of  humanity, 
forcing  it  to  contribute  to  a  superior  skill  in  distribution. 

Why  Gambling  is  Detrimental. 

The  chief  objection  to  gambling  is  not  an  economical 
but  a  moral  consideration,  for  from  a  directly  economic 
standpoint  the  detriment  to  economic  society  is  not  great. 
Inasmuch  as  it  encourages  idleness  and  vice  and  destroys 
a  large  proportion  of  the  productive  power  of  the  com- 
munity, its  economic  influence  is  bad.  Even  the  moral 
influence  caused  by  the  attempt  to  get  something  for 
nothing  leads  to  a  breaking-down  of  the  economic  system. 
In  so  far  as  gambling  interferes  with  legitimate  trade,  it 
creates  an  uncertainty  to  economic  life.  But  if  a  group 
of  men  on  Wall  Street  struggle  with  one  another  for  cer- 
tain margins  in  the  buying  and  selling  of  stocks, — if  some 
gain  and  others  lose,  the  business  world  is  not  greatly  in- 
fluenced thereby,  any  more  than  when  a  large  number  of 
men  play  poker  in  which  some  gain  and  others  lose. 
The  difference  is  plainly  that  in  gambling  no  service  is 
rendered  to  the  community,  while  in  legitimate  business, 
though  some  gain  and  others  lose,  the  losses  are  even  more 
disastrous  than  the  losses  of  gamblers;  but  still,  by  the 
process  of  legitimate  trade  or  manufacture,  some  service 
is  rendered  to  the  community,  even  though  certain  indi- 
viduals lose. 

The  moral  effects  of  gambling  are  far-reaching.  The 
development  of  that  idea  of  expectancy  destroys  the  nor- 
mal condition  of  the  individual.  It  is  far  different  from 
that  hope  of  reward  founded  on  service  to  the  community. 
But  speculative  trade  may  be  serviceable.     If  people  buy 


400  ECONOMICS. 

grain  at  a  low  price  with  the  hope  of  selling  at  a  high 
one,  they  are  anticipating  the  wants  of  the  people  and 
intending  to  supply  them.  If  individuals  buy  lands  to 
hold  until  there  is  a  rise  in  value,  it  is  also  along  the 
legitimate  process  of  trade;  in  fact,  they  are  bought  and 
sold  with  the  idea  of  a  margin  of  profit.  If  large  quan- 
tities of  mining  stock  are  bought  with  the  expectation  of 
a  rise  in  value  without  actual  development  of  the  mining 
property,  the  rise  must  be  determined  by  some  fictitious 
manipulation  in  the  market,  and  this  speculation  must  be 
disastrous. 

But  this  buying  and  selling  of  goods  on  the  market  and 
satisfying  future  delivery  has  a  tendency  to  make  the 
market  stable,  and  thus  renders  a  great  service.  Suppose 
one  man  should  anticipate  a  large  shortage  in  wheat  and 
he  should  buy  a  large  amount  of  wheat,  hoping  to  hold 
it  till  that  time.  No  one  else  discovering  this,  he  would 
buy  at  a  very  low  price,  and  when  the  shortage  came  he 
would  sell  at  a  very  high  price.  But  the  tendency  is  for 
all  business  men  to  observe  the  same  causes  and  effects 
in  business ;  and  instead  of  one  man,  suppose  a  thousand 
men  anticipate  this  shortage  in  wheat  and  attempt  to  buy 
the  surplus.  Two  things  will  happen:  first,  in  any  pur- 
chase of  wheat  there  will  be  competition  of  buyers,  and  the 
present  price  will  rise;  second,  when  delivery-time  comes 
there  will  be  competition  in  selling,  and  prices  will  tend 
to  fall.  In  other  words,  there  is  a  stability  of  values  fixed 
in  this  delivery  of  future  goods.  This  very  fact  that  the 
brightest  business  men  of  the  country  estimate  the  amount 
of  available  goods  at  present  and  in  the  future,  and  the 


ECONOMICS.  401 

extent  of  the  normal  demand  at  present  and  in  the  futurCj 
tends  to  regulate  prices,  and  that  estimated  price  regulates 
to  a  large  extent  the  amount  of  production.  Hence  it  is 
that  the  laws  of  supply  and  demand  are  carefully  esti- 
mated, and  stability  given  to  production  and  distribution, 
and  consequently  to  prices. 

Trade  in  "Futures." 

The  trade  in  "  futures/'  that  people  talk  so  much  about, 
is,  when  carried  on  properly,  a  blessing  to  both  the 
producer  and  the  consumer.  Formerly,  people  in  trade 
made  their  margins  largely  on  account  of  the  difficulties  of 
transportation  on  the  one  hand  and  the  lack  of  informa- 
tion on  the  other.  Great  caravans  started  across  the  con- 
tinent, involving  a  great  risk  in  reaching  their  destination. 
When  they  did  succeed,  goods  were  sold  at  enormous 
profits.  The  ancient  merchant  ships  that  plowed  the  waves 
under  great  difficulties  and  dangers,  running  great  risk 
from  freebooters,  pirates,  storms  and  stress  of  sea,  finally 
obtained  enormous  prices  for  goods;  but  cheap  transpor- 
tation has  destroyed  all  this.  A  large  amount  of  goods 
can  now  be  readily  thrown  from  one  part  of  the  country 
to  the  other,  or  from  continent  to  continent,  with  little 
expense.  Quick  communication  by  telegraph  accompany- 
ing cheap  transportation  enables  merchants  to  estimate 
prices  in  London  and  'New  York,  so  that  people  will  not 
pay  high  prices  through  ignorance  of  the  market  value  of 
goods.  The  result  is,  that  a  stability  of  value  is  fixed  the 
world  over,  varying  only  on  account  of  the  cost  of  trans- 
portation ;  and  margins  in  business  in  both  manufacturing 
and  trading  grow  smaller  each  year,   and  more  stable. 

—26 


402 


ECONOMICS. 


These  margins  are  reduced  largely  to  the  actual  service 
rendered  humanity  in  the  production  and  exchange  of 
goods. 

The  evil  results  of  this  exchange  in  futures  are  found 
largely  where  people  trade  without  any  intention  of  de- 
livering the  goods,  hence  without  any  intention  of  ren- 
dering any  direct  service.  It  has  developed  two  groups 
of  traders,  known  in  the  market  as  "bulls''  and  "bears." 
The  former  hope  by  excessive  buying  to  create  a  demand 
for  goods  and  thus  increase  the  price.  While  the  regular 
investor  buys  with  the  expectation  that  the  property  will 
become  more  productive,  the  bull  buys  with  the  expecta- 
tion of  forcing  prices  higher,  or  that  by  means  of  certain 
j&nancial  organizations  values  may  be  enhanced.  The 
bears,  on  the  other  hand,  seek  to  depress  prices  by  organ- 
ized speculation.  They  sell  for  future  delivery  without 
owning  or  even  possessing,  at  the  time  of  the  sale,  the 
goods  which  they  sell.  This  trading  leads  to  an  attempt  to 
corner  the  market  for  illegitimate  gains.  People  simply 
pay  the  cash  balances  without  any  intention  of  handling 
the  goods.  There  can  be  no  gain  in  turning  goods  over 
and  over  in  the  market  before  the  delivery,  that  certain 
bulls,  by  advancing  prices,  may  make  a  margin,  or  certain 
bears,  by  depressing  it,  can  ultimately  realize  a  margin. 

The  illegitimate  form  of  trading  called  "cornering  the 
market"  is  nothing  but  a  trick  of  the  gambling  process. 
By  it  buyers  seek  to  obtain  control  of  the  entire  market 
and  force  prices  higher  after  obtaining  control,  hence 
those  persons  who  have  to  deliver  goods  are  short  in  their 
delivery  and  in  danger  of  ruin.     Large  numbers  having 


ECONOMICS.  403 

agreed  to  deliver  goods  on  a  margin  are  thus  unable  to 
make  their  purchases,  and  are  consequently  short  on  de- 
livery. The  result  is,  that  many  are  forced  to  go  out  of 
business.  It  also  has  the  bad  effect  of  raising  the  prices 
to  consumers,  and  frequently  causing  great  distress;  for 
such  gambling  is  applied  to  the  necessaries  of  life,  such  as 
coal,  wood,  corn,  wheat,  petroleum,  etc. 

Speculation  in  Productive  Industxy. 
In  the  world  of  production  there  is  a  vast  deal  of  specu- 
lation. Companies  are  formed  for  the  manufacturing  of 
certain  lines  of  goods,  for  the  exploitation  of  mines,  for 
the  building  of  railroads  and  other  means  of  transporta- 
tion. 'No  one  can  tell  just  what  will  be  the  result  of  any 
enterprise  of  this  kind,  and  people  put  their  money  into 
such  concerns  with  a  good  deal  of  risk.  The  speculative 
element  enters  largely  into  mining,  and  into  some  manu- 
factures. The  essential  business  principle  to  be  observed 
is  always  to  reduce  this  risk  to  a  minimum.  Here,  as 
elsewhere,  the  greater  the  prospect  of  large  gains  the 
greater  the  risk  that  will  be  taken.  There  are  now  passing 
up  and  down  the  country  men  called  promoters,  who  per- 
suade capitalists  and  business  men  to  go  into  certain  enter- 
prises with  a  prospect  of  large  gains.  This  is  a  peculiar 
form  of  speculation,  and  the  last  great  result  of  this  kind 
of  speculation  is  found  in  the  modern  trust  and  the  pur- 
chase and  sale  of  certain  forms  of  stock.  As  the  trust  is 
discussed  in  another  place  in  this  work,  it  is  not  neces- 
ary  to  elaborate  this  form  of  speculation.  It  will  suffice 
to  say,  that  this  is  a  special  organization  of  productive 
forces  with  the  hope  of  great  gain,  and  involves  to  a  large 


404 


ECONOMICS. 


extent  the  principle  of  monopoly.  Many  of  these  specu- 
lative organizations  will  fail  because  of  the  overestimated 
power  of  earning  pictured  to  the  investors  by  the  pro- 
moters. The  speculative  market  will  be  infested  with  this 
species  of  stock,  which  will  fail  to  yield  a  return  to  the 
investors,  and  sooner  or  later  there  will  be  a  collapse  in 
the  business.  Over-organization  industrially  has  a  tend- 
ency to  destroy  some  forms  of  manufacturing,  but  it  has, 
as  in  trading,  a  tendency  to  create  stable  values  for  manu- 
factured articles  because  it  more  clearly  estimates  the 
wants  of  the  people  and  can  more  exactly  supply  them. 

Moral  and  Economic  Effects. 
The  moral  and  economic  effects  here  are  the  same  as  in 
trade.  Wherever  the  risk  is  taken  ordinarily  for  the  pur- 
pose of  supplying  the  legitimate  demands  of  the  industrial 
world,  industrial  speculation  is  legitimate.  AVherever  it 
exceeds  this  for  the  purpose  of  creating  goods  which  may 
not  be  demanded,  it  has  gone  into  exploitation  of  the 
property  already  existing,  and  is  simply  a  new  process 
of  distribution.  The  economic  effect  of  the  former  is  to 
give  stability  to  wholesale  prices  and  to  more  carefully  esti- 
mate the  demands  of  the  people.  It  will  also  be  a  means 
of  progressive  development  in  manufacturing.  The  specu- 
lative enterprise  trying  this  form  of  manufacture,  then, 
making  a  careful  study  of  what  goods  will  satisfy  human 
desire  and  seeking  at  all  times  to  reach  a  more  perfect 
satisfaction  of  the  wants  of  the  individuals,  will  tend  to 
develop  more  rapidly  the  industrial  pursuits  and  to  en- 
courage industrial  progress. 


ECONOMICS.  405 

Insurance. 
The  question  of  insurance  for  risk  is  very  important. 
Every  business  man  must  set  aside  enough  surplus  to 
insure  against  bad  years  or  bad  ventures  in  either  trade 
or  production.  Companies  are  formed  for  insurance 
against  losses.  This  has  nothing  to  do  with  gambling,  or 
illegitimate  speculation  of  any  kind.  It  is  merely  a  legiti- 
mate business  insurance  against  risk.  It  becomes  a  source 
of  security  to  business  men,  and  tends  to  create  industry, 
permanency,  and  efficiency.  Insurance  thus  renders  a 
public  service,  while  the  lottery,  the  pool,  the  policy-shop 
or  the  bookmaking  enterprise  is  an  attempt  to  obtain  gains 
through  the  process  of  illegitimate  speculation. 

Biemedies. 
It  is  easy  to  make  laws  against  gambling  of  all  forms, 
but  difficult  to  enforce  them.  It  is  quite  easy  to  define 
certain  forms  of  gambling,  and  thus  to  determine  whether 
persons  are  violating  the  laws,  but  to  apprehend  and  con- 
vict the  same,  meting  out  to  them  the  penalty  of  the  law, 
is  more  difficult.  But  it  is  very  difficult  to  distinguish  be- 
tween legitimate  and  illegitimate  speculation;  hence  it  is 
difficult  to  establish  a  law  which  will  properly  regulate  it 
Therefore  all  legislation  against  the  speculative  market 
is  liable  to  prove  disastrous,  for  it  may  interfere  with  that 
legitimate  trade  in  securities  or  produce  which  has  ren- 
dered stability  to  the  market.  The  only  hope  is  to  edu- 
cate the  business  sense  which  will  guard  alike  against  ille- 
gitimate speculation  in  trade  or  industry,  and  will  cause 
people  to  enter  only  those  enterprises  which  are  rendering 
a  distinct  service  to  humanity  in  production  or  transporta- 


406  ECONOMICS. 

tion  or  exchange,  and  for  which  an  ordinary  and  legitimate 
return  may  be  expected.  But  society  may  be  protected 
by  certain  laws  which  shall  insist  that  neither  individual 
nor  corporation  nor  trust  shall  exploit  humanity  by  a 
process  of  refined  robbery,  but  that  the  business  enter- 
prise shall  seek  to  develop  the  resources  of  the  country,  to 
manufacture  necessary  goods,  or  to  engage  in  legitimate 
trade,  or  to  perform  such  services  of  transportation  and 
other  enterprises  as  shall  yield  a  definite  benefit  to  human 
society.  This  may  be  done  by  educating  the  business 
sense  of  the  community,  and  by  creating  certain  restrictive 
laws  which  shall  be  regulative,  preventive,  and  educative 
in  their  nature. 

References  :  Hadley,  A.  T.,  Eoonomics ;  Divine,  E.  T.,  Econom- 
ics ;  American  Investor ;  Bradstreet's  Reports,  etc. ;  Duguid,  Tlie 
Story  of  the  Stock  Exchange. 


ECONOMICS.  40  r 


CHAPTEE  IX. 

TRANSPORTATION. 

Effects  of  Transportation. 

While  the  great  original  sources  of  wealth  are  found 
in  the  resources  of  nature  and  in  the  application  of  labor 
to  raw  material,  the  means  of  transportation  affect  values 
in  exchange  quite  as  much  as  the  cost  of  production  itself, 
for  the  means  of  supplying  the  demand  in  the  market  fre- 
quently determine  the  price  of  goods.  As  society  becomes 
more  complex  we  depend  more  and  more  upon  the  facility 
with  which  the  goods  are  brought  to  the  market ;  or  by 
which  we  may  be  carried  to  the  goods.  In  former  times, 
when  people  wanted  anything  they  went  where  it  was; 
now,  they  bring  it  to  them  or  go  to  it  as  they  please. 

Wealth  is  greatly  enhanced  by  transportation.  The 
gold  in  the  heart  of  the  mountains  is  of  no  practical  value 
until  it  is  brought  to  the  light  and  carried  to  a  place  of 
use.  The  expenses  of  transportation  must  in  general  be 
added  to  the  original  price  of  the  goods.  Kansas  corn, 
having  supplied  the  home  needs,  is  of  little  value  until 
transported  to  a  place  of  use.  Should  transportation  sud- 
denly be  stopped  a  month  in  some  localities,  commodities 
would  reach  fabulous  prices,  while  in  others  they  would 
command  no  value  at  all.  Thus  in  modern  life  are  we 
dependent  upon  transportation  for  both  necessaries  and 
luxuries  of  life. 

The  facilities  for  transportation  tend  to  increase  the 


408 


ECONOMICS. 


division  of  labor.  Living  alone,  man  must  produce  alone 
food,  clothing,  and  all  articles  of  use  and  luxury;  while 
by  means  of  transportation  he  may  apply  his  whole  time 
to  one  thing  and  receive  the  benefits  of  the  combined 
labor  of  the  world.  The  poorest  workman  in  one  of  our 
cities  lives  on  the  products  of  the  world.  It  takes  the 
products  of  both  hemispheres  to  supply  his  needs.  The 
wool  that  makes  his  coat  comes  from  one  place,  the  coat 
from  another;  the  leather  that  makes  his  boots  from  one 
section,  and  the  manufactured  articles  from  another.  His 
tea  is  from  China,  his  coffee  from  Brazil,  and  so  for  every- 
thing he  uses.  Hides  are  shipped  from  Kansas  City  to 
!N"ew  York  and  from  New  York  to  ISTorth  Carolina  to  be 
tanned,  then  back  again  to  New  York  or  Boston  to  be  made 
into  boots  or  shoes,  which  are  again  reshipped  to  Kansas 
City  to  be  consumed  by  wear.  By  this  double  transporta- 
tion and  repeated  combinations  of  labor  the  price  of  the 
manufactured  article  is  greatly  increased  above  the  cost 
of  the  raw  material. 

Prices  Equalized. 
Rapid  transportation  of  goods  tends  to  equalize  prices, 
while,  as  was  stated  above,  the  price  of  the  goods  in  the 
market  is  regulated  by  the  relation  of  the  supply  to  the 
demand.  With  our  facilities  for  exchange  and  transpor- 
tation the  price  of  staple  articles  always  tends  to  reach 
the  cost  of  production.  The  prices  of  dry  goods  in  Eastern 
and  Western  cities  tend  to  be  the  same  as  transportation  is 
cheapened.  So,  likewise,  the  prices  of  Western  products 
will  be  less  in  the  markets  of  the  East  as  transportation 
is  quickened  and  cheapened. 


ECONOMICS.  409 

What  advantages  are  there,  then,  in  cheapening  trans- 
portation? First,  any  increased  demand  for  goods  will 
give  the  seller  the  advantage  and  not  the  transporter ;  and 
secondly,  goods  received  in  exchange  can  be  laid  at  your 
door  at  less  expense.  This  is  the  same  as  receiving  a  higher 
price  for  the  articles  sold  in  exchange. 

Equalizing  Industry. 
One  of  the  greatest  effects  of  cheap  transportation  is 
the  opening  up  of  new  lands  and  the  extension  of  agri- 
culture. The  rapid  development  of  the  Mississippi  Valley 
and  the  far  West  could  have  been  made  possible  only  by 
the  magnificent  system  of  railroads  which  brought  home- 
seekers  to  the  uncultivated  fertile  lands.  This  process  of 
agricultural  extension  has  without  doubt  been  carried  on 
too  rapidly  to  be  conducive  to  the  highest  development  of 
agricultural  production.  The  opposite  is  also  true,  that 
a  system  of  cheap  transportation  tends  to  concentrate 
manufactures  in  cities  and  in  the  most  favorable  localities. 
Truly,  it  has  often  been  said,  the  railroad  is  a  city-builder 
or  a  city-destroyer,  as  the  case  may  be.  The  effect  of  rapid 
transit  on  population  is  especially  observable  in  our  mod- 
ern cities,  where  the  residence  portion  of  the  city  is  widely 
scattered  for  miles  from  the  center  of  business.  On  the 
other  hand,  in  the  business  portion  of  the  city  population 
becomes  compact  or  concentrated. 

Economic  Value  of  Cheap  Transportation. 

All  of  the  foregoing  propositions  tend  to  show  us  what 
a  great  wealth-producer  commerce  is,  and  how  rapid  and 
cheap  transportation  affects  every  department  of  economic 
life.     Consider  the  limitations  that  would  be  set  upon  a 


410  ECONOMICS. 

country  isolated  from  other  countries  in  modern  economic 
life,  and  it  will  be  seen  that  the  value  of  cheap  transporta- 
tion cannot  be  overestimated.  In  looking  back  at  the  de- 
velopment of  the  West,  because  of  the  railroads  which 
opened  and  developed  its  fertile  valleys  and  its  mines,  the 
power  of  transportation  is  readily  seen;  but  the  question 
is  as  important  to-day  as  ever.  We  are  still  seeking  the 
cheapest  transportation  possible  for  the  goods  we  have  to 
sell,  and  also  for  those  we  must  import  from  other  places. 
Those  countries  which  are  fortunate  enough  to  have 
water-ways  find  thereby  a  great  saving  in  transportation. 
By  this  means  heavy  freight,  such  as  stone,  iron,  and 
grain,  can  readily  and  cheaply  be  moved,  while  lighter 
articles  of  freight  can  be  left  for  railroad  transportation. 

Advantages  of  Water  Transportation. 

In  all  cases  where  heavy  freight  is  to  be  moved  and 
rapid  transit  is  not  absolutely  demanded,  water  communi- 
cation is  much  cheaper  and  better  than  railway.  "No 
mechanical  constructions  have  yet  been  invented  which 
can  compete  in  the  matter  of  cheapness  with  transporta- 
tion over  or  through  deep  waters  of  lake  or  ocean.  The 
friction  caused  on  a  dry  road-bed  cannot  compete  with  it 
in  respect  to  expense,  and  the  deeper  the  water  the  cheaper 
the  transit,  other  things  being  equal. 

Thus,  freight  can  be  carried  on  the  ocean  by  means  of 
twenty-five  feet  draught  at  the  rate  of  one-half  of  one 
mill  per  ton  per  mile;  while  in  the  great  lakes,  with 
from  fourteen  to  sixteen  feet  draught,  the  cost  is  one  and 
one-half  mills  per  ton  per  mile.  If  we  consider  the  Erie 
canal   as   the   best  example   of   canals   in   America,   the 


ECONOMICS. 


411 


freight  will  cost  about  three  mills  per  ton  per  mile.  Pro- 
fessor Haupt,  of  the  University  of  Pennsylvania,  has 
stated  the  cost  of  water  transportation  in  the  form  of  a 
practical  law :  that  "^^the  cost  of  movement  in  water  varies 
inversely  as  the  draught  of  the  vessel."  In  1884  the  rates 
by  rail  from  Chicago  to  E^ew  York  were  30  cents  per  hun- 
dred pounds;  from  I^ew  York  to  Liverpool,  10.5  cents 
additional.  The  average  rate  of  grain  on  the  railroad  in 
1885  from  Chicago  to  I^ew  York  was  14  cents.  By  lake 
and  canal  route  it  was  4.55  cents.  Many  more  examples 
might  be  given  of  the  cheapness  of  water  communication. 
The  Erie  canal  has  had  a  great  influence  in  cheapening 
rates  of  transportation  from  the  ISTorthwest  to  New  York. 
All  of  the  competing  lines  of  railroad  have  been  obliged 
to  reduce  their  freight  rates.  The  lake-and-canal  route  has 
had  a  direct  influence  on  all  roads  parallel,  and  an  in- 
direct influence  on  the  entire  trafiic  of  the  North  and  West. 
If  it  is  true  that  water  communication  is  so  valuable,  why 
has  it  been  neglected  ? 

Water  Transportation  Neglected. 

The  reason  that  water  transportation  has  been  neglected 
in  the  United  States  is  on  account  of  the  railroad.  The 
railroad  came  into  use  just  as  we  were  attempting  a  sys- 
tem of  water-ways  to  penetrate  the  nation.  Not  very 
much  had  been  done  at  that  time.  The  canals  were  but 
little  more  than  ditches ;  the  rivers  had  not  been  prepared 
for  deep-water  boats;  and  the  lakes  had  not  been  fully 
utilized.  The  result  was,  that  when  the  railroad  was 
built,  with  such  rapid  transit  everything  ran  quickly  to 
railway  trafllc  and  the  water-ways  were  neglected.     The 


412  ECONOMICS. 

surplus  capital  of  the  country  went  to  building  railroads, 
and  the  government  did  not  feel  the  need  of  spending 
money  for  the  encouragement  of  means  of  water  transpor- 
tation. As  a  result,  the  water-ways  that  had  already  been 
constructed  were  allowed  to  decay.  Wherever  competing 
lines  of  canals  existed  the  railroads  bought  up  the  canals 
and  destroyed  their  effective  work  in  a  reduction  of  the 
rates,  or  else  destroyed  the  canal  altogether.  The  course 
pursued  by  the  railroads  has  helped  to  destroy  the  canals. 
Wherever  the  water-ways  have  been  maintained,  they  have 
been  compelled  to  compete  with  the  gradually  decreasing 
rates  of  the  railroads,  and  have  thus  helped  to  regulate 
freight  fares  after  the  manner  of  competition.  There  is  a 
feeling  that  even  the  railroads  have  made  a  mistake  in 
this  matter,  for  the  roads  that  have  run  alongside  of  com- 
peting water-ways  have  been  helped  rather  than  hindered 
by  the  water  transportation.  Should  the  Nicaragua  canal 
be  built,  it  will,  in  the  end,  increase  the  volume  and 
the  income  of  the  transcontinental  traffic.  It  is  a  mistake 
to  suppose  that  a  competing  water-way  will  in  the  long 
run  hurt  a  railroad.  It  simply  carries  the  heavier  freight 
at  so  much  cheaper  rates  that  industries  are  stimulated, 
commerce  is  increased,  and  the  rates  reduced. 

Bailroad  Problem*. 
There  are  many  problems  relating  to  railroads  in  the 
United  States.  The  policy  of  our  nation  has  been,  first, 
to  encourage  railroads  by  granting  them  lands  and  sub- 
sidies and  giving  them  liberal  charters.  This  has  been 
followed  by  the  period  of  intense  competition  on  the  part  of 
the  railroad,  ending  in  war  and  combination.     Then  there 


ECONOMICS. 


413 


followed  on  the  part  of  the  states  an  attempt  to  regulate 
rates  through  constitutions,  legislative  enactments,  and 
railroad  commissions.  Much  of  this  contention  between 
the  people  and  the  railroad  has  been  shortsighted  on  the 
part  of  both,  for  they  have  common  interests.  If  the 
railroad  works  to  develop  the  country,  it  will  reap  its  own 
reward.  On  the  contrary,  if  the  people  work  to  develop 
the  railroad,  their  country  and  community  will  be  im- 
proved. 

Abuses  of  Railroad  Management. 

Many  questions  have  arisen  concerning  the  abuses  of 
railroad  management.  In  some  countries  the  states  own 
and  manage  their  own  roads.  But  in  the  United  States 
we  have  always  had  private  management ;  therefore,  until 
government  ownership  obtain,  there  is  no  other  way  of 
regulating  roads  but  through  government  restriction  and 
control.  The  chief  cause  for  complaint  in  America  has 
been  that  freight  and  fares  are  too  high,  and  that  rail- 
roads discriminate  against  persons  an(J  places  in  violation 
of  their  own  rules.  While  many  abuses  have  crept  in  with 
regard  to  excessive  rates  and  discrimination,  it  should  be 
said  that  railroad  rates  have  greatly  decreased  in  the 
United  States  since  1880,  and  in  most  instances  have  de- 
creased in  a  greater  ratio  than  the  cost  of  transportation 
has  decreased.  It  should  be  said  that  railroads  represent 
a  system  of  expensive  transportation,  and  the  extent  of 
improvements  necessary  to  keep  up  with  competition  only 
adds  to  the  extra  expense  of  railroad  freights. 

There  has  been  much  complaint  against  pooling.  The 
railroads  have  claimed  to  be  ruined  by  competition,  and 
have  resorted  to  combination.     As  given  by  Mr.  Iladley, 


414  ECONOMICS. 

this  usually  takes  one  of  four  forms  :  First,  agreement  to 
maintain  rates  ;  second,  agreement  to  divide  the  field; 
third,  agreement  to  divide  the  traffic  ;  and  fourth,  agree- 
ment to  divide  the  earnings. 

The  last  three  methods  are  known  as  pooling.  Pooling 
has  its  own  dangers  and  its  own  benefits.  Where  excessive 
competition  reduces  the  rates  below  cost,  they  must  be 
made  up  sooner  or  later.  This  forces  railroads  to  com- 
bine. The  unsteadiness  of  rates  is  detrimental  to  both 
shippers  and  carriers.  Therefore,  so  far  as  pooling  gives 
steadiness  to  business  and  adherence  to  a  schedule  of  rates, 
it  is  an  advantage  to  railroads  and  the  public.  Though  it 
is  sometimes  taken  advantage  of  by  roads  when  excessive 
power  is  had  in  competition,  this  is  quite  unusual,  for  a 
good  pooling  system  maintains  a  better  freight  rate  than 
does  excessive  competition. 

Another  grievance,  probably,  against  the  railroads,  is 
the  manner  in  which  their  stock  has  been  capitalized.  In 
the  early  railroad -building  much  abuse  was  evident  by  the 
improper  bonding  of  railroads  beyond  their  actual  value 
and  the  issue  of  stock  beyond  a  normal  amount,  thus 
turning  out  a  representation  of  more  property  than 
actually  existed.  This  led  to  a  partial  deception,  and 
entailed  great  losses  upon  persons  who  had  invested  in 
railroad  securities.  The  railroads  were  forced  into  a 
position  where  they  must  raise  interest  on  excessive  bonds 
and  stocks. 

Another  grievance,  probably,  has  been  that  of  issuing 
passes.  This  was  begun  in  a  mild  way  by  railroads  to 
their  employes  and  their  families  and  various  important 
personages,  and  especially  to  people  doing  business  with 


ECONOMICS.  416 

their  respective  lines.  But  the  abuse  continued  until 
passes  were  given  to  any  person  whose  good-will  was  im- 
portant to  the  corporation.  Thus  legislatures,  railroad 
commissions,  newspaper  men,  proprietors  of  summer 
hotels,  and  agents  of  companies  doing  business  for  the 
railroads,  were  all  given  passes.  While  it  was  first  at  the 
option  of  the  railroads,  it  has  become  now  apparently  a 
virtual  necessity,  for  the  public  "  hold  up  "  the  railroads 
and  demand  passes  of  them.  At  first,  the  people  fought 
the  pass  system  bitterly.  Now,  the  railroads  are  more 
eager  than  the  people  to  get  rid  of  the  nefarious  system. 
It  is  bad  for  both  the  railroad  and  public,  for  it  leads  to 
distrust  in  both  cases. 

The  competition  of  railroad  corporations  with  each  other 
for  the  business  in  a  given  territory  has  given  rise  to  the 
practice  of  rebates  to  large  or  favored  shippers,  causing 
great  distrust  of  the  railroads.  This  practice  has  made 
it  possible  for  the  large  business  to  develop  at  the  ex- 
pense of  the  small  one.  It  is  generally  conceded  that 
railways  which  receive  their  first  right  to  existence  from 
the  state,  and  which  have  been  declared  common  carriers 
by  the  courts,  should  not  discriminate  against  individuals 
or  towns  by  carrying  goods  cheaper  for  one  than  for  an- 
other. It  is  one  of  the  chief  causes  of  the  development 
of  the  trust,  an  institution  obnoxious  to  the  public.  The 
rate  bill  passed  by  Congress  in  1906  has  for  its  purpose 
the  correction  of  this  evil.  If  it  can  be  corrected,  it  will 
result  in  great  advantage  to  both  shippers  and  railways. 
It  remains  to  be  seen  whether  a  commission  at  Washing- 
ton will  be  able  to  fix  rates  on  over  two  hundred  thousand 
miles  of  railway,  existing  under  a  great  variety  of  con- 
ditions. 


4rl6  ECONOMICS. 

Railroad  Bates. 

It  is  a  good  principle  that  transportation  should  be  ren- 
dered nearly  at  cost,  so  that  no  monopoly  tariffs  should 
accrue  to  the  managers.  When  interest  on  capital,  wages 
of  labor,  and  compensation  for  managing  ability,  with  all 
expenses,  are  paid,  transportation  should  have  little  left. 
For  the  system  should  conduce  to  the  greatest  public 
prosperity.  This  means  that  there  should  be  a  rational 
system  of  freights  and  fares;  rates  should  be  reasonable. 
The  railroads  think  this  means  reasonable  to  them;  the 
shippers  think  it  means  reasonable  to  them;  whereas  it 
means,  when  properly  analyzed,  reasonable  to  both.  It  is 
right  that  railroads  should  receive  fair  compensation  for 
the  carrying  of  freight ;  it  is  also  reasonable  that  shippers 
should  have  their  freight  carried  at  prices  commensurate 
with  the  business  they  are  doing.  This  problem  of  trans- 
portation is  a  very  great  one.  Where  population  is  dense 
and  business  is  almost  unlimited,  railroads  can  very  read- 
ily reduce  their  prices  to  the  advantage  of  themselves  as 
well  as  the  people.  But  in  the  sparsely  settled  community, 
where  there  is  a  wide  extension  of  territory  and  a  limited 
amount  of  business,  railroading  must  of  necessity  be  ex- 
pensive, and  railroads  govern  their  freights  and  fares  ac- 
cordingly. 

The  attempt  to  fix  maximum  rates  has  been  nearly  a 
failure.  There  is  no  reason  why  the  government  should 
not  fix  such  a  rate.  The  railroad  is  a  common  carrier,  and 
to  a  certain  extent  a  servant  of  the  people.  Touching 
nearly  every  interest  in  the  community,  it  has  no  right  to 
create  extortionate  rates  to  the  interference  of  that  busi- 
ness.    But  the  advisability  of  establishing  such  a  rate  is 


ECONOMICS. 


417 


doubtful.  If  fixed  too  high,  then,  as  in  the  case  of  Eng- 
land, it  becomes  inoperative.  If  fixed  too  low,  then  it 
can  be  shown  in  the  courts  that  it  amounts  to  a  confiscation 
of  property,  and  becomes  again  inoperative.  But  a  legisla- 
ture might  in  one  year  ^x  a  maximum  rate  which  would 
yield  a  satisfactory  income  to  the  railroads,  while  in  the 
following  year,  owing  to  a  depression  in  business,  it  would 
be  too  low.  The  railroads,  taking  redress  in  the  courts, 
would  have  the  law  declared  unconstitutional.  The  prac- 
tice of  charging  "all  the  trafiic  will  bear''  is  a  good  one 
if  honestly  administered  by  the  railroads.  It  is  often  true 
that  railroads,  with  all  their  sharpness  of  business,  are 
not  keen  in  discovering  their  ultimate  interests,  in  their 
anxiety  to  subserve  immediate  interests.  A  railroad  that 
defrauds  the  people  tends  ultimately  to  destroy  property 
and  business  and  to  injure  its  own  prosperity.  On  the 
other  hand,  the  people  who  seek  to  oppress  the  railroads, 
because,  as  they  say,  they  are  soulless  corporations,  may  so 
cripple  the  railroads  that  it  would  cripple  the  business 
of  the  country,  lower  the  assessed  valuation  of  railroads, 
and  throw  the  burden  of  taxation  upon  the  people.  Thus 
we  return  to  the  proposition  that  their  interests  are  com- 
mon, and  that  there  must  be  wise  legislation,  if  any  at  all, 
if  the  interests  of  the  people  would  be  subserved. 

Railroad  Oommissions. 

The  modern  system  of  management  of  railroads  in  the 
United  States  is  that  of  commissions.  These  commissions 
have  been  established  in  over  one-half  of  the  States  in 
the  Union.  There  are  two  grades  of  commissions:  those 
with  power  to  act,  and  those  with  only  advisory  powers. 
—27 


4:18  ECONOMICS. 

These  two  types  of  commissions  have  been  copied  through- 
out the  United  States  by  various  States.  Kansas,  in  a 
recent  law,  created  a  Court  of  Visitation  with  power  to 
act.  This  brought  every  question  in  controversy  at  once 
into  the  courts;  but  in  seeking  to  give  power  to  the  com- 
mission, it  created  an  independent  court,  and  therefore  was 
declared  unconstitutional. 

The  Interstate  Commerce  Commission  of  the  United 
States  has  done  a  vast  deal  to  unify  the  system  of  railroad 
traffic  throughout  the  United  States  and  establish  a  uni- 
form system  of  bookkeeping  and  reports.  Thirty  years 
ago  there  was  scarcely  a  publication  of  any  value  on  rail- 
roads in  the  United  States;  now  there  are  very  many 
publications,  both  reports  and  well-written  treatises  on 
railroads.  This  has  brought  the  people  to  an  understand- 
ing, in  part,  of  the  railroads,  and  has  established  to  a 
certain  extent  the  idea  that  the  railroads  are  responsible 
to  the  public  for  their  actions. 

Abuses  of  Monopoly  Profits. 
Kailroads  are  frequently  shortsighted  enough  to  forget 
the  principles  of  monopoly  profits.  Wherever  they  can 
extend  the  traffic  to  such  an  extent  as  to  get  a  larger  net 
return  with  a  reduction  of  prices,  they  should  do  so.  A 
very  good  illustration  of  this  occurred  some  years  ago  in 
Austria-Hungary,  where  by  a  system  of  zone  tariffs  the 
tariffs  were  reduced  from  20  to  80  per  cent.  The  result 
was  a  vast  increase  of  the  traffic,  and  the  railroads  made 
more  out  of  the  increase  than  they  had  made  before.  But 
in  this  case  the  fares  before  reduction  were  so  high  as 
almost  to  prohibit  traffic.     Wherever  there  is  sufficient 


ECONOMICS.  419 

population,  a  reduction  in  rates  will  almost  always  increase 
revenue  sufficiently  to  meet  extra  expenses ;  and  to  double 
the  traffic  does  not  anywhere  nearly  double  the  expense. 
The  railroads  that  seek  to  make  a  return  in  services  to  the 
public  by  putting  expenses  down  will  gain  more  rapidly 
than  the  railroad  that  seeks  to  make  a  large  gain  by 
putting  prices  "up.  The  railroads  that  realize  that  they 
are  public  servants,  and  seek  to  serve  well,  will  in  the  long 
run,  with  a  rationally  conducted  business,  reap  the  largest 
reward. 

References:  Hadley,  A.  T.,  The  Railroad  Problem;  Stickney, 
A.  B.,  Railroad  Problem;  Dabney,  W.  B.,  Public  Regulation  of 
Railways;  Dixon,  F.  H.,  State  Railway  Control;  Meyer,  B.  H.,  Rail- 
way Legislation  in  the  United  States ;  Meyer,  H.  R.,  Government 
Regulation  of  Railway  Rates. 


420  ECONOMICS. 


CHAPTER  X. 

THE   COMMERCE   OF  NATIONS. 

The  Advantages  of  Commerce. 

The  gain  resulting  from  trade  between  nations  is  of 
the  same  nature  as  that  between  individuals  :  it  is  relative 
rather  than  absolute.  The  exchange  of  the  "relatively- 
superfluous  fpr  the  relatively  necessary  "  brings  an  advan- 
tage to  both  parties  making  the  exchange,  although  the 
advantages  accruing  to  each  may  not  be  equal,  because 
of  the  unequal  skill  of  traders.  However,  among  civil- 
ized nations  where  there  is  free  competition  and  cheap 
transportation,  the  advantages  accruing  to  different  na- 
tions trading,  in  the  long  run,  balance  each  other.  Yet 
there  are  instances  of  unequal  gains  between  isolated 
communities.  Thus,  the  fur  traders  of  America  fre- 
quently obtained  furs  from  Indians  by  exchanging  arti- 
cles worth  one-tenth  of  their  value.  The  desire  of  the 
Indian  may  have  been  satisfied  with  what  he  obtained  ; 
but  it  still  remains  true  that  in  this  sharp  bargaining  the 
person  who  obtained  the  valuable  articles  became  rich 
clear  beyond  the  condition  of  the  Indian  with  whom  he 
traded.  The  same  principle  is  observed  among  the  an- 
cient civilized  nations  in  their  trade  with  isolated  com- 
munities of  less  culture  and  advancement.  In  such 
instances  immense  wealth  was  gained  by  the  skillful 
trader.  Even  in  modern  times  the  ships  that  brought 
goods  to  California  and  other  isolated  ports  of  the  New 


ECONOMICS.  421 

World  charged  fabulous  prices  for  their  goods.  While 
they  may  have  satisfied  the  desires  of  the  people,  they 
accumulated  wealth  at  the  expense  of  the  necessities  or 
fancies  of  those  with  whom  they  traded. 

In  recent  trade  among  modern  nations  the  same  princi- 
ple is  to  be  observed.  While  the  advantages  will  balance 
each  other  if  conditions  are  equalized,  one  nation  may 
have  the  advantage  of  another  in  the  large  amount  of 
raw  material  at  hand  or  in  its  cheap  processes  of  manu- 
facture ;  also,  it  may  have  a  superior  advantage  in  rightly 
adjusted  protective  tariffs  and  skill  in  competing  in  the 
market.  Again,  it  may  have  a  large  advantage  if  it  has 
nearly  all  the  carrying  trade,  as  in  the  case  of  England 
in  comparison  with  the  United  States.  In  all  legitimate 
processes  of  commerce  all  persons  engaged  in  it  should 
be  benefited,  and  in  the  long  run  all  of  these  benefits  will 
tend  to  be  equalized.* 

Trade  Among  Primitive  Peoples. 
Commerce  in  its  formal  meaning  could  not  be  said  to 
have  existed  among  the  natural  races  nor,  indeed,  among 
those  of  barbarous  character.  Among  these  people  each 
tribe  was  self-sufficient ;  it  produced  what  it  consumed. 
Many  of  the  tribes  engaged  in  barter  of  certain  articles 
and  in  war  plundered  the  goods  of  one  another,  but  it 
was  not  until  the  division  of  labor  and  the  development 
of  systematic  manufacturing  that  anything  worthy  the 
name  of  commerce  existed.  At  first  this  trade  of  primi- 
tive peoples  was  merely  incidental  to  their  meeting,  but 
subsequently  traders  sprang  up  who  went  from  tribe  to 
tribe  carrying  various  wares.     Intertribal  trade  was,  at 

♦  See  Chapter  VI.,  Book  III.,  Economics. 


422  ECONOMICS. 

first,  a  rude  species  of  barter,  in  which  the  value  of  the 
article  had  but  little  weight.  It  was  a  method  of  "  swap- 
ping "  to  promote  good  will  or  to  please  the  fancy.  Sub- 
sequently it  became  a  method  of  satisfying  the  needs  of 
the  tribes,  which  could  not  be  done  with  home  produc- 
tion. Among  the  primitive  tribes  of  America,  Indian 
traders  existed  who  carried  trinkets  and  ornaments  from 
tribe  to  tribe.  In  India,  where  all  ancient  customs  seem 
to  have  crystallized,  the  single  trader  continued  down  to 
recent  times.  Among  barbarous  peoples,  trade  was  car- 
ried on  overland  with  great  caravans. 

Commerce  of  Ancient  Nations. 
After  national  life  had  been  well  begun,  a  system  of 
commerce  between  ancient  nations  sprang  up,  and  the 
earliest  records  of  China,  India,  Russia,  Assyria,  Ethiopia, 
and  Phoenicia  are  of  wealthy  nations  engaged  in  exten- 
sive commerce.  This  brought  into  existence  a  distinct 
class  of  merchants,  or  traders.  The  methods  of  trans- 
portation of  ancient  nations  varied  according  to  their 
geographical  conditions  and  the  degree  of  their  economic 
development.  First,  there  were  the  great  caravans  of  the 
desert,  in  which  the  carrying  power  was  the  camel  or,  as 
in  India,  the  elephant.  In  western  Asia  the  caravans 
were  chiefly  conducted  by  Arab  traders,  which  traveled 
overland  between  the  great  cities  of  Egypt,  Assyria,  Per- 
sia, and  Palestine.  Subsequently  river  traffic  developed, 
but  it  was  national  rather  than  international  commerce. 
The  Ganges  and  the  Indus,  the  Tigris  and  the  Euphrates, 
the  Nile,  and  in  modern  times  the  Danube,  the  Elbe,  and 
the  Po  were  means  of  traffic  between  different  cities  and 
countries.     Later,  as  boatmen  became  more  venturesome, 


ECONOMICS.  423 

the  inland  seas  became  highways  of  commerce,  and  early- 
traders  ventured  on  the  Persian  Gulf,  the  Black,  Medi- 
terranean, Caspian,  and  jEgean  seas. 

The  Phoenicians  were  Masters  of  Commerce. 
The  only  people  of  antiquity  that  could  aspire  to  claims 
of  commercial  greatness  were  the  Phoenicians,  who  were 
the  first  to  become  really  masters  of  traffic  on  inland 
seas.  The  great  and  wealthy  cities  of  Tyre  and  Sidon, 
situated  on  the  east  shore  of  the  Mediterranean  Sea,  be- 
came the  centers  of  an  extensive  commerce.  From  these 
points  the  Phoenicians  trafficked  with  Egypt,  Assyria, 
India,  and  subsequently  with  Greece,  Rome,  Spain,  and 
Britain,  and  became  familiar  with  all  the  coasts  and  ports 
of  the  Mediterranean.  Abandoning  the  prevalent  system 
of  obtaining  wealth  by  conquest  and  plunder,  these  people 
gained  their  wealth  and  independence  through  industry 
and  commerce.  The  secret  of  their  power  seems  to  have 
been  an  inordinate  desire  for  gain,  skill  in  ship-building, 
the  manufacture  of  certain  articles  not  found  in  other 
nations,  and  the  adventurous  disposition  of  their  seamen. 
The  advantage  of  having  the  carrying  trade  for  the  world 
was  a  source  of  enormous  wealth,  and  the  cities  became 
rich  and  populous.  For  the  five  or  six  hundred  years 
that  the  Phoenicians  ruled  the  seas,  they  planted  colonies 
in  Greece,  Italy,  northern  Africa,  Spain,  and  Asia  Minor. 
The  most  important  of  these  colonies  was  that  of  Car- 
thage, built  and  planned  after  the  city  of  Tyre.  The 
Carthaginians  continued  to  develop  wealth  by  trade  in 
the  same  manner  as  the  parent  colony.  They  developed 
sufficient  strength  to  again  and  again  cope  with  the 
Roman  nation,  but  were  finally  overthrown.     During  the 


424  ECONOMICS. 

period  of  Phoenician  supremacy,  the  Greeks  developed  a 
limited  commerce,  although  her  states,  cities,  and  colonies 
were  largely  self-sufficient.  Rome  was  not  a  commercial 
nation,  for  primarily  her  wealth  came  from  agriculture, 
and  when  she  became  strong  enough  to  gain  her  wealth 
by  trade,  she  obtained  it  by  conquest  and  plunder  instead. 
Yet  man}^  ships  laden  with  foreign  goods  came  up  the  Po 
and  the  Tiber  and  visited  the  seaport  towns. 
Mediaeval  Commerce. 

The  great  commercial  period  which  lies  between  the 
fall  of  the  Roman  Empire,  476  A.D.,  and  the  discovery 
of  America  by  Columbus  is  marked  by  three  important 
developments :  namely,  Byzantine  commerce,  the  rise  of 
the  Italian  cities,  and  the  organization  of  the  Hanseatic 
League.  After  Constantine  established  the  seat  of  the 
empire  at  Byzantium,  this  city  gradually  grew  into  a 
center  of  Oriental  trade.  For  a  thousand  years  the  strait 
of  Bosporus  was  the  gateway  of  trade  between  the  East 
and  the  West;  for  a  thousand  years  the  trade  of  the 
Mediterranean  Sea  and  the  caravan  routes  was  focused 
at  Byzantium  or  Constantinople.  During  the  Dark  Ages 
the  city  of  Constantinople  fostered  what  little  commerce 
existed  in  the  East,  while  in  the  west  of  Europe  the 
monasteries  and  princes  encouraged  and  controlled  trade. 

It  was  an  age  of  national  distrust  and  national  hostili- 
ties, but  a  passive  trade  was  carried  on  between  various 
nations,  generally  conducted  by  foreign  traders.  Charle- 
magne, by  extending  the  boundaries  of  his  territory,  made 
it  possible  to  encourage  traffic  in  foreign  goods.  The 
Arab  Moors  at  first  greatly  opposed  traffic  with  the 
Orient,  but  subsequently  encouraged  it,  but  it  remained 


ECONOMICS.  425 

for  the   Crusades  to  acquaint  the  East  with  the  West 
and  open  once  more  the  trade  of  nations. 

The  commerce  of  the  Middle  Ages  reached  its  highest 
development  through  the  Italian  cities.  The  cities  of 
Araalfi,  Genoa,  Pisa,  Venice,  and  Florence,  in  southern 
Europe,  were  ready  to  take  advantage  of  trade  relations 
that  sprung  up  between  the  East  and  the  West ;  indeed, 
they  began  their  great  career  by  transporting  the  troops 
and  goods  of  the  Crusaders  to  Palestine.  From  this  time 
on,  the  cities  grew  in  wealth,  Venice  being  the  leader  of 
all  in  trade.  The  Venetians  had  been  natural  sailors  for 
five  hundred  years  prior  to  the  Crusades,  hence  they  were 
more  ready  than  any  other  national  group  to  take  advan- 
tage of  maritime  trade.  It  is  estimated  that  in  the  four- 
teenth century  Venice  had  three  thousand  merchant  ships, 
manned  by  twenty-five  thousand  seamen.  The  Venetians 
began  their  commercial  career  by  supplying  fish  and  salt 
to  the  world,  in  exchange  for  which  they  obtained  food, 
clothing,  and  timber  for  their  galleys;  but  their  chief 
wealth  arose  from  trade  with  the  Orient.  They  brought 
the  rich  silks  and  manufactured  articles  of  the  Orient  and 
exchanged  them  with  products  of  western  and  northern 
Europe.  The  merchants  of  Venice  thus  had  the  advan- 
tage of  an  immense  traffic,  as  the  Venetians  were  their 
own  carriers  as  well  as  the  commercial  carriers  of  other 
nations.  As  a  consequence,  wealth  developed  rapidly. 
Indeed,  the  history  of  the  world  shows  that  the  nation 
which  becomes  preeminent  in  commerce  usually  develops 
its  carrying  trade  along  with  it,  and  that  the  nation  that 
obtains  the  supremacy  of  the  carrying  trade  is  very  apt 
to  obtain  the  commercial  supremacy  of  the  world. 


426  ECONOMICS. 

In  conjunction  with  the  trade  of  the  Italian  cities  we 
have  the  organization  of  the  Hanseatic  League  in  the 
north  of  Europe.  Independent  cities  entered  into  a 
league  to  protect  their  trade  from  pirates  and  to  facili- 
tate the  exchange  of  goods.  The  number  of  these  cities 
finally  reached  eighty -five,  of  which  Hamburg,  Liibeck, 
Bremen,  and  Cologne  were  among  the  important  ones. 
These  cities  were  connected  by  inland  trade  with  Italian 
cities,  and  while  the  cities  of  the  League  grew  rapidly 
in  wealth,  their  prosperity  only  added  to  the  increase  of 
wealth  of  the  Italian  cities,  which  were  gateways  to  the 
Oriental  trade. 

The  Hanseatic  League  established  rules  for  the  regula- 
tion of  trade  and  developed  commerce  to  a  great  extent. 
Primarily  established  to  prevent  piracy,  to  prevent  the 
extortion  of  lords,  and  to  stimulate  production  and  trade, 
the  League  laid  the  foundation  of  mercantile  law  and 
began  the  policy  of  reciprocity  and  freedom.  For  four 
hundred  years  it  was  prominent  in  the  control  of  com- 
merce, and  during  this  time  practically  monopolized  the 
commerce  of  northern  Europe.  It  maintained  armies 
and  navies  and  carried  on  war  against  kings.  But  its 
arbitrary  power  finally  became  intolerable  and  its  exist- 
ence a  menace  to  trade.  It  began  to  decline  in  the  latter 
part  of  the  fourteenth  century,  and  by  the  end  of  the  fif- 
teenth century  it  had  lost  its  power.  The  decline  of 
feudalism  and  the  rise  of  national  life,  coupled  with  the 
determination  of  each  nation  to  control  its  own  com- 
merce, and  the  competition  aroused  by  a  developing 
trade,  swept  away  all  concessions  and  left  the  League 
helpless. 


ECONOMICS.  427 

Nature  of  Mediaeval  Commerce. 

The  traders  of  the  Middle  Ages  to  a  great  extent  dis- 
posed of  their  goods  through  markets  and  fairs  which 
were  established  on  certain  days  of  the  week.  These 
originated  from  the  fact  that  it  would  be  advertised  that 
a  certain  caravan  or  ship  laden  with  goods  would  appear 
at  a  certain  time,  and  in  order  to  obtain  the  goods  the 
people  came  from  all  parts  of  the  country.  As  the  cities 
developed,  these  became  regular  markets.  Finally  the 
traders  who  attended  to  the  sale  of  these  goods  estab- 
lished regular  shops  to  take  care  of  the  surplus  goods. 
As  trade  became  more  extended  and  regular,  these  shops 
became  continuous  and  the  transporters  delivered  their 
goods  to  the  shops.  Gradually  the  shopkeepers  became 
regular  importers  of  goods.  From  that  time  on  the  lines 
were  gradually  drawn  between  the  wholesale  merchant, 
importer  or  jobber,  and  the  retail  merchants.  The  com- 
petition in  trade  led  to  various  restrictions  among  the 
cities  and  towns  engaged  in  trading,  and  had  a  tendency 
to  create  certain  privileges  and  monopolies.  There  was 
much  jealousy  among  the  towns,  especially  among  the 
Italian  towns,  and  much  rivalry,  which  caused  bitter 
feeling.  Their  salvation,  however,  lay  in  the  fact  that 
they  developed  manufactures  very  rapidly.  While  the 
nations  or  countries  that  have  the  carrying  trade  of 
commerce  have  tremendous  advantages,  no  nation  has 
ever  built  up  an  extended  commerce  without  having  a 
large  amount  of  raw  materials  or  manufactured  products 
to  export  to  other  nations. 

The  gild  merchant,  a  mediaeval  institution  for  the 
control   of  trade,  was   a    protective    association   which 


428  ECONOMICS. 

included  all  those  who  were  engaged  in  buying  and  selling 
goods  within  a  given  town.  Only  those  who  were  mem- 
bers of  the  gild  had  the  privilege  of  trade.  In  this  way 
local  merchants  protected  themselves  against  traders  of 
other  towns  and  foreign  traders  as  well.  Following  this 
protective  idea,  there  came  in  vogue  a  body  of  laws  and 
regulations  of  trade  known  as  the  "law  merchant."  Mer- 
chants made  their  own  rules  controlling  trade,  to  suit 
their  own  needs.  The  "  gild  merchant "  was  represented 
in  several  types.  Besides  the  gild  type,  the  law  of  the 
municipality,  the  central  national  law,  and  the  law  of  vol- 
untary, arbitrary  bodies  included  the  chief  sources  of  the 
gild  merchant.     It  laid  the  foundation  of  mercantile  law. 

In  England  the  local  gild  merchant  became  prominent 
at  an  early  period,  but  subsequently  the  foreign  trade  of 
England  fell  into  the  hands  of  foreigners.  Real  English 
commerce  began  at  the  appearance  of  the  English  traders 
or  "merchants  adventurers,"  as  they  were  called,  who 
began  to  compete  for  the  carrying  trade.  Originally 
the  term  Avas  applied  to  merchants  who  undertook  to 
export  goods  to  new  or  unrecognized  markets,  or  to  mer- 
chants of  various  towns  who  were  organized  for  their 
own  protection.  Finally  the  company  of  "  Merchants 
Adventurers  "  was  incorporated,  which  became  a  power- 
ful and  wealthy  association.  In  1564  they  received  a 
royal  charter  from  Henry  VII.,  under  the  title  of  "  The 
Merchants  Adventurers  of  England."  This  gave  a  great 
impetus  to  an  independent  national  commerce. 
Modern  Commerce. 

Mediaeval  commerce  resembled  the  ancient  commerce 
in  the  concentration  of  trade  in  towns  and  cities.     The 


ECONOMICS.  429 

chief  difference  existed  in  the  more  widely  extended  area 
over  which  it  operated,  having  longer  routes  of  travel 
and  a  larger  number  of  stations.  It  also  differed  in  the 
larger  number  of  articles  for  exchange,  arising  chiefly  on 
account  of  the  development  of  manufactures  and  the  in- 
creased interchange  of  goods.  Modern  commerce,  which 
may  be  said  to  date  from  1492,  is  marked  by  oceanic 
transportation.  It  was  the  era  of  discovery  and  coloniza- 
tion. First,  the  invention  of  the  mariner's  compass  gave 
an  impetus  to  sea  travel.  The  use  of  gunpowder  brought 
new  means  of  defense  to  commerce.  The  discovery  of 
America  opened  up  new  inducements  to  oceanic  travel, 
and  the  discovery  of  a  route  around  the  southern  part 
of  Africa  to  the  East  Indies  and  another  route  around 
the  southern  part  of  South  America  to  the  Philippine 
Islands,  opened  up  great  ocean  highways  of  travel.  This 
occurred  at  the  period  of  the  rise  of  modern  nations. 
Portugal,  Spain,  The  Netherlands,  England,  and  France 
began  to  compete  for  the  commerce  of  the  world. 
The  Mercantile  System. 
During  the  period  of  the  rise  of  national  commerce 
there  came  into  existence  a  system  of  trade  so  important 
as  to  mark  an  epoch  of  history.  It  has  been  known  as 
the  Mercantile  System,  and  represents  a  doctrine  of  trade 
which  has  its  advocates  in  modern  times.  Mercantilism 
was  a  distinct  step  in  the  evolution  of  commerce  just  as 
monarchy  was  in  the  evolution  of  government.  In  the 
fifteenth  century  there  was  great  confusion  of  trade, 
caused  by  the  local  jealousies  and  rivalries  among  the 
local  and  foreign  merchants,  the  Merchants  Adventurers, 
and  the  Hanse  Merchants.     A  movement  was   started 


430  ECONOMICS. 

which  had  a  double  purpose,  to  bring  about  unity  in 
domestic  affairs  and  to  develop  national  defense  in  trade. 
It  was  the  monarchical  principle  applied  to  commercial 
affairs.  It  was  a  process  of  "  state-making  and  national 
economy-making  at  the  same  time."  *  Mercantilism  rep- 
resents the  transformation  and  reorganization  of  indus- 
trial society  as  well  as  the  rise  of  national  commerce.  It 
not  only  transformed  and  united  the  municipal,  industrial, 
and  commercial  interests,  but  set  up  barriers  of  trade 
against  the  encroachments  of  other  nations.  To  subject 
local  interests  to  national  interests,  and  to  advance  the 
latter  beyond  the  interests  of  other  nations,  were  the 
prime  motives  of  the  mercantilist  doctrine.  In  the  sub- 
sequent development  of  mercantilism  it  stood  for  govern- 
ment restrictions  on  commerce  and  trade.  Restrictions 
on  imports  or  exports,  limitation  of  the  carrying  trade 
to  national  ships,  the  tariff  on  exports  and  imports,  and 
the  attempt  to  make  a  favorable  balance  of  trade  so  as  to 
leave  gold  and  silver  in  a  given  country,  were  some  of 
the  cardinal  points  in  its  later  history.  While  defective 
in  many  of  its  general  tenets,  mercantilism  was  service- 
able in  building  national  life  and  national  commerce.  Its 
policy,  especially  in  England  and  France,  had  a  tre- 
mendous power  in  establishing  national  supremacy.  It 
subsequently  affected  The  Netherlands,  and  later,  Italy 
and  Germany.  In  the  nineteenth  century  there  was  a 
great  reaction  from  the  policy,  especially  in  England; 
but  in  more  recent  times  it  has  revived,  so  that  each 
nation  seeks  to  protect  its  foreign  commerce  either  by 
tariff,  subsidy,  or  reciprocity  treaty. 

*  Schmoller,  The  Mercantile  System. 


ECONOMICS.  431 

National  Competition. 

Portugal  at  first  became  prominent  and  obtained  a 
monopoly  of  the  East  India  trade,  especially  in  the  trade 
in  spices,  but  war  with  Spain  furnished  an  opportunity 
for  the  Dutch,  which  they  readily  seized.  The  early  mari- 
time enterprise  of  Portugal,  stimulated  by  the  genius  and 
daring  of  Prince  Henry  the  Navigator,  led  to  discoveries 
and  an  extended  commerce.  The  result  was  the  com- 
mercial supremacy  of  Portugal  in  India  and  China  and 
the  competition  with  the  Dutch  in  trade.  At  the  open- 
ing of  the  modern  period  (1495-1521)  Lisbon  was  the 
chief  emporium  for  the  distribution  of  Oriental  goods, 
and  Portugal  reached  her  zenith  of  commercial  power. 
The  decline  of  her  prestige  in  the  East  was  followed  by 
her  forced  union  with  Spain.  After  her  freedom  was  ob- 
tained (1640),  war  with  The  Netherlands  further  weak- 
ened her  power;  but  a  commercial  treaty  with  England 
resulted  in  the  transference  of  her  trade  from  the  Dutch 
to  the  English  and  strengthened  the  already  powerful 
nation.  Spain  had  a  tremendous  trade  in  the  Western 
Hemisphere  on  account  of  her  colonization  and  produc- 
tion of  the  precious  metals.  This  gave  her  great  pres- 
tige in  the  commercial  world,  but  her  policy  eventually 
caused  her  ruin.  She  failed  to  develop  home  manufac- 
tures, and  the  silver  obtained  from  America  passed  out  of 
Spain  into  France  and  The  Netherlands  to  pay  for  the 
manufactured  articles  used  by  Spain  in  home  consumption 
and  foreign  trade. 

The  rise  of  the  Dutch,  whose  central  cities  were  Ant- 
werp and  Amsterdam,  shifted  the  monopoly  of  trade  to 
The  Netherlands.     They  soon  secured  the  monopoly  of 


432  ECONOMICS. 

the  East  India  trade  from  Portugal.  The  Dutch  were 
thrifty  people  who  understood  the  art  of  commerce.  At 
home  they  not  only  developed  manufactures,  but  estab- 
lished a  system  of  banking  and  finance  which  was  of 
great  service  on  their  own  account  and  also  on  account 
of  the  commerce  of  the  world.  The  Dutch  had  a  strong 
mercantile  policy  which  established  great  fleets  for  carry- 
ing on  commerce,  for  they  made  commerce  an  end  in 
itself ;  but  their  commercial  development  had  extended 
beyond  their  national  and  political  life,  and  therefore 
they  were  not  able  to  hold  their  own  in  the  competition 
of  nations  for  trade.  Subsequently  they  lost  this  trade 
in  the  development  of  the  East  and  West  India  Com- 
panies, which  came  into  competition  with  them  and 
obtained  a  monopoly  of  the  trade. 

The  French  and  the  English. 
Down  to  the  time  of  Henry  VIII.  the  Lombard,  Dutch, 
and  Hanse  merchants  monopolized  the  most  profitable 
branches  of  trade.  In  England,  shipping  was  almost 
wholly  in  foreign  hands,  but  the  Tudor  kings  had  a 
special  object  in  exalting  wealth  and  the  maritime  power 
of  England.  A  feeling  of  resentment  continued  to  grow 
against  foreign  merchants  until  it  was  expressed  against 
the  Hanseatic  League,  whose  factory  at  the  Steel  Yard 
operated  independent  of  the  laws  and  social  order  of 
England.  It  was  in  the  reign  of  Edward  VI.,  in  1552, 
that  the  shackles  of  British  trade  were  broken  by  placing 
the  Hanse  factory  on  the  same  basis  as  other  merchants 
so  far  as  commerce  duties  were  concerned.  Subsequently, 
in  the  time  of  Elizabeth,  the  Steel  Yard  factory  was  closed. 
From  this  time  on  British  trade  was  promoted  by  every 


ECONOMICS.  433 

effort  of  government.  The  explorations  and  discoveries 
by  the  English  during  the  sixteenth  century  widely  ex- 
tended commerce.  Companies  were  formed  for  trade, 
including  the  East  India  Companies  and  the  company  of 
Merchants  Adventurers.  They  controlled  a  large  portion 
of  the  export  trade,  but  the  whole  development  of  manu- 
factures and  trade  were  under  a  system  of  monopolies. 
These  monopolies  eventually  became  oppressive. 

But  Cromwell,  by  the  celebrated  act  of  1651,  suppressed 
private  monopoly  and  made  a  gigantic  monopoly  of  the 
British  government.  The  law  forbade  the  carrying  of 
goods  to  or  from  England  or  her  colonies  in  any  except 
British  vessels.  As  a  result,  ship-building  sprang  up, 
and  subsequently  a  tremendous  trade  was  developed  ;  but 
more  than  all,  the  great  work  of  English  development 
during  the  Tudor  period  was  made  secure  by  this  act. 
In  France  the  same  system  of  restriction  was  instituted 
under  Colbert,  for  mercantilism  had  culminated  in  France 
more  than  in  any  other  country.  The  idea  prevailed 
that  a  country  grew  rich  only  through  its  trade  balance, 
and  every  effort  was  made  to  secure  the  favorable  balance 
of  trade  through  the  restriction  of  exports  and  imports. 
But  England  had  become  mistress  of  the  seas  because  of 
her  immense  carrying  trade  and  the  consequent  develop- 
ment of  her  manufactures  and  agricultural  products.  * 
Recent  Commerce. 

The  main  courses  of  English  trade  continued  to  en- 
large down  to  the  end  of  the  Napoleonic  wars  in  1815, 
but  a  new  era  of  commercial  development  seemed  to  date 
from  this  event.     Industrial  revolution,  brought   about 

*  See  p.  866,  Economics. 


434  ECONOMICS. 

by  the  introduction  of  power  manufacture,  changed  the 
course  of  commerce  by  the  introduction  of  machinery  in 
the  making  of  cotton  and  woolen  goods,  the  building  of 
ship  canals,  the  division  of  labor,  and  the  development  of 
the  factory  system.  The  use  of  steam  and  water  power, 
and  the  quickening  of  manufactures  and  of  domestic 
commerce  gave  a  great  impetus  to  foreign  trade  in  Eng- 
land, and  her  commerce  continued  to  extend.  The  intro- 
duction of  the  laissez-faire  doctrine  through  the  teachings 
of  the  early  economists  advocated  the  removal  of  restric- 
tions on  trade.  The  Physiocratic  doctrine  in  France  had 
a  similar  influence  in  that  country.  But  nations  that 
had  gained  such  prestige  under  restrictive  measures  were 
able  to  advance  without  government  aid.  The  commer- 
cial supremacy  of  England  continued  on  account  of  her 
large  manufacturing  interests  and  her  immense  carrying 
trade  on  the  ocean.  This  was  aided  by  the  repeal  of  the 
Corn  Laws  and  the  development  of  free  trade.  By  these 
measures  England  had  a  cheaper  food  with  which  to  feed 
her  army  of  workers.  Having  built  up  her  commerce, 
having  become  mistress  of  the  seas,  having  developed  a 
foundation  for  manufactures,  England  entered  upon  free 
trade  at  the  opportune  moment.  Her  commerce  and 
trade  went  forward  with  a  bound. 

American  Carrying  Trade. 
In  the  nineteenth  century,  America  became  England's 
great  competitor  in  the  carrying  trade.  Down  to  1857 
the  carrying  trade  of  the  United  States  increased  rapidly  ; 
since  that  time  it  has  relatively  declined.  This  can  be 
attributed  to  several  causes  :  first,  the  Civil  War,  which 
absorbed  all  the  energies  of  the  United  States  for  several 


ECONOMICS. 


485 


years,  had  a  tendency  to  destroy  merchant  marine  rather 
than  develop  it.  England  also  had  an  advantage,  since 
1860,  in  the  construction  of  steel  vessels.  The  tariff  has 
prevented  a  development  of  American  shipping,  and  the 
immense  internal  improvement  of  the  United  States  has 
absorbed  capital  that  otherwise  might  have  gone  into 
the  international  commerce.  The  accompanying  table 
shows  the  relative  decline  of  the  carrying  trade. 

THE   VALUE    OF   UNITED    STATES    IMPORTS   AND    EXPORTS    AND   THE 
PERCENTAGE    CARRIED    IN   AMERICAN   VESSELS. 


Exportft  and  Imports 

Per  Cent. 

1857 

$   723,850,823 

762,288,550 

991,896,899 

1,503,593,404 

1,647,139,093 

2,089,528,616 

70.5 

1860 

66.5 

1870 

35.6 

1880 

1890 

17.42 
12.85 

1900 

9.3 

Yet,  during  this  period,  the  United  States  has  become 
the  greatest  export  nation  in  the  world.  Her  enormous 
supply  of  raw  material,  agricultural  products,  and  the 
recent  development  of  manufactures  under  the  adminis- 
tration of  a  protective  tariff  have  advanced  her  foreign 
trade.  The  following  table  gives  the  exports  of  the  four 
chief  industries  and  shows  the  rapid  development  of 
export  trade  in  recent  years. 

PRINCIPAL    EXPORTS    FROM    THE    UNITED    STATES. 


1898 

1899 

1900 

1905 

Cotton    

Bread  stuffs    . . . 

Provisions   

(Including    meat 
and   dairy    prod- 
ucts) 

Iron,  steel,  and 

1247,977,311 
333,987,119 
167,340,960 

1233,656,490 
273,999,699 
175,508,608 

$266,922,065 
262,744,078 
184,453,055 

$379,965,014 
107,732,916 
169,965,873 

manufactures. 

70,441,109 

93,782,431 

121,992,590 

134,728,363 

486  ECONOMICS. 

Development  of  American  Commerce. 
Having  recovered  from  the  Civil  War,  the  internal  com- 
merce of  the  United  States  began  to  expand  and  subse- 
quently her  international  trade.  Since  1885,  she  has 
become  a  formidable  competitor  of  France,  England, 
and  Germany  in  the  world's  markets.  She  has  become 
the  greatest  manufacturing  nation  in  the  world,  as  well 
as  the  greatest  export  nation.  In  1905  the  value  of  her 
manufactures  was  about  fifteen  thousand  millions,  or 
greater  than  the  estimated  manufactures  of  the  United 
Kingdom,  Germany,  and  France.  The  total  value  of 
manufactures  entering  the  world's  market  is  estimated 
at  four  thousand  million ;  of  this  the  United  States  sup- 
plies but  five  hundred  million,  or  12|  per  cent.  It  indi- 
cates that  there  is  a  vast  opportunity  for  the  United 
States  to  develop  the  exportation  of  manufactured  goods. 
But  the  discrepancy  between  the  amount  of  the  product 
and  the  international  trade  is  not  necessarily  indicative 
of  an  impoverished  condition  of  the  United  States;  in- 
deed, it  represents  just  the  opposite.  The  rapid  devel- 
opment of  the  United  States  has  enabled  her  to  absorb 
over  twelve  thousand  five  hundred  millions  of  her  own 
manufactures  and  to  export  less  than  five  hundred  mil- 
lions. This  is  evidence  of  tremendous  wealth  and  pros- 
perity ;  also,  it  is  evidence  of  the  principle  that  domestic 
commerce  is  of  far  greater  importance  to  the  nation  than 
foreign  commerce,  and  that  periods  of  prosperity  of  the 
nation  cannot  be  estimated  by  the  amount  of  its  foreign 
trade.  Nevertheless,  America  is  to-day  in  sharp  competi- 
tion with  England,  France,  and  Germany  for  the  markets 
of  the  Old  World  and  for  the  newer  markets  of  Africa, 
South  America,  and  the  Orient. 


ECONOMICS. 


437 


EXPORTS    OF    THE    UNITED    STATES    BY    SOURCES    OF    PRODUCTION. 


Percentage 

Agriculture    

Domestic  manufacture  

Haw  products  (miscel.)    

Fisheries   

Forests  

Mining 


I860 


190k 


81.13 

59.48 

12.76 

31.52 

1.41 

.40 

1.31 

.60 

3.26 

4.80 

.13 

3.20 

100.00 


100.00 


Causes  of  Commercial  Success. 
The  commercial  success  of  a  nation  depends  primarily 
upon  the  amount  of  raw  materials  and  manufactured  arti- 
cles that  it  has  to  export  after  the  home  consumption  has 
been  abundantly  supplied  ;  upon  transportation  by  land 
and  water  from  the  interior  to  the  seaboard  ;  a  cheap 
and  bountiful  food  supply  for  a  thrifty  and  vigorous 
labor  population  ;  the  development  of  the  merchant  ma- 
rine, and  the  successful  choice  of  trade  routes  whereby 
vessels  may  be  laden  with  marketable  goods  for  the 
return  voyage.  Moreover,  it  is  necessary  in  modern 
times  that  merchants  promote  and  advertise  their  inter- 
ests in  the  countries  in  which  they  are  seeking  market. 
The  question,  too,  of  the  good  will  of  nations  is  very  im- 
portant, and  commercial  treaties  which  promote  favorable 
terms  of  trade  are  exceedingly  valuable.  The  tariff  may 
be  a  detriment  to  foreign  trade,  but  it  may  also  be  used  at 
times,  like  other  restrictive  measures,  to  temporarily  pro- 
mote the  welfare  of  a  nation.  However,  to  the  nation 
that  has  large  resources  of  raw  material  and  abundant 
food  supply,  first-class  labor  power,  abundant  opportuni- 
ties for  steam,  water,  and  electric  power,  free  international 


438  ECONOMICS. 

trade  would  be  a  great  advantage  in  the  long  run.  Some 
nations  have  advanced  their  carrying  trade  by  giving  sub- 
sidies to  the  ship  companies.  This  may  develop  for  a 
time  the  number  of  the  ships  owned  by  the  exporting 
nation  giving  the  subsidy,  but  in  the  long  run  it  is  detri- 
mental to  national  welfare  and  development.  * 
Principles  of  International  Trade. 
Commerce  is  an  instrument  by  which  commodities  are 
placed  in  the  hands  of  consumers,  and  that  system  of 
commerce  which  will  do  this  the  most  effectually  and  at 
the  least  cost  is  of  greatest  benefit  to  the  consumer.  In 
the  thrifty  nation,  domestic  commerce  is  of  far  greater 
importance  than  international.  In  modern  times,  through 
universality  of  invention,  through  steam  and  electricity 
applied  to  machinery,  each  nation  becomes  more  and  more 
self-sufficient  and  independent  in  the  supply  of  manu- 
factured goods.  The  agricultural  product  is  limited  by 
the  soil  and  climate,  and  a  nation  must  import  what  it 
cannot  raise.  The  exportation  of  the  surplus  goods  of  a 
nation  has  a  great  influence  on  its  prosperity,  but  the 
power  to  consume  all  of  its  raw  materials  and  manufac- 
tured products  may  be  evidence  of  greater  financial 
prosperity,  for  it  is  only  a  small  number  of  workers  of 
any  nation  who  are  putting  labor  power  into  products 
for  international  trade.  It  is  estimated  that  between 
one-fifth  and  one-sixth  of  the  wage-earners  of  Great 
Britain  are  putting  labor  power  into  goods  for  exporta- 
tion to  foreign  markets.  Sooner  or  later,  as  all  foreign 
trade  must  balance,  the  imports  and  exports  of  all  the  na- 
tions combined  must  be  the  same.     There  is  a  theory  that 

*  See  Chapter  III.,  Book  IV. 


ECONOMICS.  439 

the  wealth  of  a  nation  is  made  by  its  trade  balance  and  that 
the  extent  to  which  exports  exceed  imports  is  evidence 
of  national  prosperity  and  power.  But  this  is  a  false 
assumption,  for  if  a  nation  imports  goods,  it  is  an  evi- 
dence that  it  has  means  to  pay  for  them  and  also  assumes 
that  there  is  some  advantage  to  be  gained  in  the  importa- 
tion of  these  goods.*  In  other  words,  the  nation  that 
purchases  abroad  has  added  to  its  own  stock  of  wealth  ; 
on  the  other  hand,  it  may  be  selling  goods  that  might  be 
consumed  at  home  but  are  put  upon  the  market  to  satisfy 
some  more  urgent  demand  of  indebtedness.  Yet,  in  the 
long  run,  a  nation  could  not  continue  to  import  goods 
without  loss  unless  it  should  be  followed  by  a  period  of 
export  trade.  However,  international  trade  may  bene- 
fit all  nations  engaged  in  it  just  as  domestic  trade 
may  benefit  all  individuals  engaged  in  it.  The  gains, 
however,  in  international  trade,  are  of  the  same  nature 
as  the  gains  of  domestic  trade,  that  is,  they  are  merely 
relative. 

References:  Adams,  C.  C,  Commercial  Geography;  Lynd,  L.  W., 
Commercial  Geography  ;  Price,  L.  L.,  English  Commercial  Industry ; 
Trotter,  Spencer,  The  Geography  of  Commerce ;  United  States 
Statistical  Abstract ;  Yeats,  John,  The  Growth  and  Vicissitudes  of 
Commerce. 

*  See  Chapter  VI.,  Book  III. 


BOOK  IV. 


PUBLIC  ECONOMICS, 


(441) 


CHAPTER  I. 

RESTRICTIVE  MEASURES. 

Free  Trade  and  Free  Competition. 

As  has  been  previously  stated,  the  laws  of  pure  eco- 
nomics are  based  upon  the  condition  of  free  trade  and 
free  competition.  That  is,  if  laws  act  with  precision  the 
condition  of  free  trade  and  free  competition  must  be  ful- 
filled without  hindrance.  There  must  be  no  monopoly 
to  prevent  the  competition,  or  other  hindering  restrictions 
on  trade.  All  philosophical  discussions  of  political  econ- 
omy recognize  these  principles.  That  these  conditions  are 
the  best  for  economic  society  is  not  necessarily  true. 

Mercantilists. 

The  first  great  group  of  economists  were  the  Mercan- 
tilists, who  advocated  among  other  things  restrictive  meas- 
ures,in  trade.  They  held  that  all  gains  in  a  nation  arose 
from  trade,  and  that  certain  laws  should  be  established  for 
keeping  money  in  the  country  and  preventing  its  going  out, 
as  the  amount  of  money  was  an  indication  of  the  amount 
of  wealth  of  a  community.  This  principle  extends  re- 
strictive measures  in  trade  and  attempts  to  control  certain 
industries.  The  advocacy  of  restriction  was  carried  to 
such  an  extent  as  almost  to  exclude  the  consideration  of 
freedom  of  trade  and  industry. 

Physiocrats. 
There  followed  a  group  of  people  who  advocated  among 
other  things  the  principle  that  all  values  arise  ultimately 

(443) 


444  ECONOMICS. 

from  the  soil,  and  they  sought  to  promote  agriculture  and 
industry,  and  to  place  little  value  upon  trade  as  a  means 
of  developing  wealth.  Thej  advocated  also  the  freedom  of 
trade,  and  that  all  restrictions  should  be  taken  from  it. 
This  led  later  to  the  development  of  the  laissez-faire  doc- 
trine. 

Adam  Smith  followed,  with  his  Wealth  of  !N'ations, 
which  really  established  the  principle  of  freedom  of 
trade.  The  nations,  having  tried  restriction,  found  it 
to  be  a  detriment,  and  to  so  greatly  interfere  with  trade 
as  to  retard  their  growth,  and  finally  reacted  in 
favor  of  non-interference  and  free  trade.  The  philoso- 
phers held  that  all  interference  of  the  government  was  a 
detriment  to  the  progress  of  nations;  that  if  they  would 
let  things  alone  the  laws  of  trade  would  be  established 
according  to  justice  and  the  best  interests  of  the  commu- 
nity; that  each  individual  seeking  his  own  interest  would 
seek  the  interest  of  the  community  at  large.  This  theory 
prevailed  to  a  large  extent,  and  the  world  felt  the  influence 
of  it  for  many  years;  but  it  finally  awoke  to  the  idea 
that  no  one  formula  or  theory  could  at  all  times  govern  the 
actions  of  nations  in  relation  to  trade,  and  that,  as  political 
laws  were  made  to  establish  and  insure  freedom,  it  was 
necessary,  in  order  to  secure  freedom  and  justice  in  the 
commercial  world,  to  establish  certain  regulations;  and 
so  the  modern  world  has  reacted  from  this  position  of 
laissez-faire.  Perhaps  the  growth  of  monopolies,  which 
has  tended  at  all  times  to  break  down  free  competition 
and  free  trade,  has  promoted  the  interference  of  nations  in 
regard  to  the  regulation  of  trade  and  industry. 


ECONOMICS.  445 

Modern  Restrictions  Upon  Industry  and  Trade. 

A  large  number  of  laws  have  been  passed  restricting 
industry  and  trade;  protective  tariffs  indulged  in  to  a 
greater  or  less  extent  by  all  nations ;  laws  regulating  and 
limiting  the  power  of  corporations;  laws  regulating  the 
limits  of  certain  industries, — all  show  the  development  of 
a  tendency  toward  restrictive  measures. 

Legislation  in  Favor  of  Labor. 

We  find  also  a  large  number  of  laws  made  for  the  insur- 
ance of  the  rights  of  labor;  laws  controlling  the  building 
of  factories,  for  the  protection  of  life  and  limb,  sanita- 
tion and  safety  of  the  laborers, — all  showing  that  the  gov- 
ernment has  its  interest  in  all  classes  of  people.  A  large 
number  of  labor  commissions  in  the  States  of  the  Union 
and  in  various  foreign  countries  which  inquire  into  the 
condition  of  labor  and  recommend  certain  laws  concern- 
ing its  protection  and  control,  show  the  tendency  of  re- 
strictive measures  in  this  line. 

Legislation  in  Favor  of  Commerce. 

Much  legislation  has  been  done  to  develop  commerce. 
The  carrying  trade  of  different  nations  has  been  encouraged 
by  laws  and  subsidies.  Also,  the  extension  of  railroads 
has  been  encouraged  by  means  of  land  grants  and  subsi- 
dies ;  nations  have  given  encouragement  to  commerce  and 
commercial  enterprises  by  the  development  of  canals  and 
water-ways.  There  are  many  other  means  for  the  encour- 
agement of  commerce.  The  Interstate  Commerce  Com- 
mission, established  by  the  United  States  Government  to 
inquire  into  the  conditions  of  railroads  and  commerce  in 
general  in  the  United  States  and  for  their  restriction  and 


446  ECONOMICS. 

regulation,  and  the  various  state  commissions,  all  have  a 
tendency  to  place  transportation  within  proper  bounds. 

Legislation  Regulating  Industry. 
Considerable  legislation  has  taken  place  in  recent  years 
to  encourage  the  development  of  the  resources  of  the 
country.  At  one  time  a  bounty  was  given  for  the  produc- 
tion of  beet  and  cane  sugar,  which  had  a  tendency  to 
develop  that  industry  for  a  time.  Had  it  continued,  the 
United  States  would  soon  have  had  sufficient  sugar  manu- 
factories to  supply  its  own  needs.  Whether  this  would 
have  been  a  wise  movement  or  not  would  have  depended 
upon  the  effect  in  increased  taxation  and  the  effect  upon 
other  industries  and  trade.  Bounties  have  been  given  for 
the  planting  of  forest  trees  in  semi-arid  districts.  The 
protective  tariff  is  urged  as  a  means  of  developing  home 
industries. 

Government  Restriction  of  Monopolies. 

The  prohibition  of  the  manufacture  of  certain  articles 
has  been  declared  in  various  instances.  A  law  against  the 
manufacture  and  sale  of  intoxicating  drinks  is  among  the 
most  important.  Other  industries  are  purposely  burdened 
by  a  process  of  taxation,  such  as  liquors,  tobacco,  oleomar- 
garine, etc.  These  taxes  are  laid  with  a  view  to  the  partial 
suppression  of  the  traffic.  While  at  times  they  have  more 
or  less  influence,  upon  the  whole  they  are  ineffective  as 
prohibitive  measures. 

Plane  of  Competition. 

There  is  a  great  discussion  and  a  wide  difference  of 
opinion  as  to  the  extent  to  which  the  government  should 


ECONOMICS.  447 

go  in  the  control  of  industries.  The  fundamental  principle 
lying  at  the  base  of  all  this  may  be  stated :  That  the  gov- 
ernment should  regulate  all  competition.  It  should  set 
a  limit  beyond  which  competition  should  not  go ;  it  should 
also  aid  and  assist  certain  industries  if  possible  by  general 
legislation,  without  special  favoritism  and  without  detri- 
ment to  other  industries. 

Government  Should  Realize  to  the  People  the  Benefits  of 
Monopoly. 

Having  determined  the  plane  of  competition  so  that 
there  is  freedom  and  justice  within  certain  limits,  the  gov- 
ernment should  go  a  step  farther,  and  realize  to  the  peo- 
ple the  benefits  of  a  monopoly  which  exists  from  the 
nature  of  things.  There  is  no  reason  why  the  governtnent 
should  allow  the  development  of  a  certain  phase  of  in- 
dustrial life  which  shall  overshadow  and  overbear  the  ef- 
forts of  a  large  portion  of  our  citizens  in  industrial  life, 
any  more  than  it  should  allow  the  growth  of  a  certain  phase 
of  political  life  which  shall  overshadow  and  overbear  a 
large  number  of  citizens,  oppressing  them  and  preventing 
them  from  having  the  freedom  and  rights  of  political  life. 
Therefore,  wherever  this  monopolistic  power  becomes  op- 
pressive and  unjust  and  un-American,  it  should  be  regu- 
lated by  the  government.  Take  the  case  of  the  street- 
railway  corporations  and  the  gas  companies.  Franchises 
are  granted  to  a  few  persons  in  the  name  of  a  corporation 
for  the  purpose  of  serving  the  public.  The  people  own  the 
streets  through  which  these  persons  operate,  and  by  their 
vote  exclude  all  but  a  few  individuals  from  carrying  on 
the  special  business.     It  is  right  that  the  people  should 


448  ECONOMICS. 

have  a  rental  for  tlie  use  of  the  streets  by  private  parties 
to  the  exclusion  of  all  others;  it  is  absurd  not  to  charge 
the^  rental.  Hence,  in  the  form  of  a  franchise  tax  or 
cheaper  rates,  or  both,  or  in  the  form  of  municipal  owner- 
ship, the  government  must  realize  to  the  people  the  benefits 
of  the  monopoly  arising  on  account  of  rental  of  streets 
and  public  property. 

References :  Ely,  Monopolies  and  Trusts ;  Bemis,  Municipal  Mo- 
nopolies; Kipley,  ^V^  Z.,  Pools,  Trusts,  and  Corporations;  Jenks,  J.  W., 
The  Trust  Problem ;  Bolen,  J.  W.,  Plain  Facts  as  to  the  Trusts  and 
the  Tariif . 


ECONOMICS. 


449 


CHAPTEK  II. 

PUBLIC  CONTROL  OF  INDUSTRIES. 

General  Management  of  Industries. 

There  are  several  ways  in  which  the  state  or  government 
may  deal  with  industries:  First,  it  may  let  them  en- 
tirely alone,  leaving  them  to  the  laws  of  trade  and  competi- 
tion on  the  supposition  that  the  largest  justice  will  be 
meted  out  without  any  interference ;  second,  it  may  estab- 
lish such  rules  and  regulations  as  would  control  them 
Avithin  particular  limits;  third,  it  may  own  and  operate 
such  industries  as  seem  necessary  for  the  benefit  of  the  com- 
munity. Perhaps  no  one  of  these  rules  could  be  laid  down 
as  universally  correct,  for  the  government  seeks  under  all 
circumstances  to  provide  for  the  well-being  of  the  com- 
munity at  large,  and  may  do  anything  that  is  possible  or 
necessary  for  securing  this  well-being.  The  question  to 
be  considered  is :  What  will  produce  that  largest  well-being 
at  the  least  expense  to  the  community?  In  other  words. 
What  is  expedient  to  do  under  the  circumstances  ?  rather 
than.  What  is  theoretically  just  ? 

In  many  instances  there  are  industries  to  be  let  alone 
entirely,  with  the  exception  of  certain  rules  of  justice  ap- 
plying to  the  intercourse  of  individuals.  Second,  there  are 
those  industries  which  are  better  controlled  with  certain 
laws  and  regulations  for  the  purpose  of  determining  and 
securing  justice   for  the   people.      In   the   third   place, 


450  EcoisroMics. 

there  are  those  industries  that  are  difficult  to  regulate  and 
which  it  would  be  an  advantage  to  the  people  for  the  state 
to  own  and  control,  and  under  such  circumstances  one  must 
presume  almost  entirely  upon  proper  administration  of 
affairs  in  order  to  secure  justice. 

Control  by  Commissions. 
One  of  the  most  important  of  modern  methods  for  the 
control  of  industry  is  represented  in  the  growth  of  railroad 
commissions  in  the  United  States.  These  commissions 
vary  in  regard  to  their  powers.  Most  of  them  are  simply 
advisory  and  limited  in  their  jurisdiction.  Some  of  them 
have  great  power  to  act.  The  Interstate  Commerce  Com- 
mission has  done  a  vast  deal  to  regulate  industry,  notwith- 
standing the  fact  that  its  powers  have  been  greatly  cur- 
tailed by  the  courts,  having  established  uniform  systems 
of  bookkeeping  and  uniform  methods  of  reports.  They 
have  established  that  public  carriers  are  public  servants, 
and  are  amenable  to  the  public  for  their  wrong-doings; 
and  have  also  done  much  toward  establishing  uniform  rates 
and  preventing  extortion.  The  same  may  be  said  of  nearly 
every  railroad  commission  in  the  United  States.  These 
commissions  gradually  gain  the  confidence  of  the  people 
and  gain  more  power ;  and  while  many  people  advocate  the 
public  ownership  of  the  railroads  as  a  public  necessity,  it 
appears  that  it  will  be  determined  in  most  instances  that 
the  increasing  power  of  the  commissions  will  eventually 
furnish  them  ample  control  and  regulation. 

Government  Ownership  of  Bailroads. 

There  are  many  who  advocate  the  government  ownership 
of  railroads  because  they  are  said  to  be  natural  monopolies. 


ECONOMICS.  451 

At  best,  thej  can  only  be  said  to  be  partial  monopolies; 
and  a  system  of  government  ownership,  as  established  in 
different  communities  and  states,  has  not  proved  entirely 
satisfactory.  It  would  entail  a  vast  debt  on  the  United 
States  to  procure  all  the  railroads,  which  are  now  capital- 
ized at  over  ten  billions  of  dollars.  It  would  involve  the 
employment  of  a  vast  army  of  people,  which,  if  not  put 
upon  the  civil-service  rules,  would  be  a  dangerous  political 
power. 

It  would  have  some  advantages  in  insuring  a  uniform 
system  of  rates  and  of  traffic.  It  would  prevent  extortion 
and  injustice,  which  sometimes  prevail.  It  would  prevent 
waste  in  some  ways  by  the  consolidation  of  different  lines 
and  the  abolishment  of  parallel  roads.  It  would  prevent 
waste  in  the  management,  dispensing  with  numerous  high- 
salaried  officials.  And  yet,  on  the  other  hand,  without  wise 
management  railroads  might  fail  to  yield  a  dividend  suf- 
ficient to  defray  the  interest  on  the  payment  of  a  necessary 
sinking  fund  for  the  reduction  of  the  debt  which  must  be 
assumed  in  the  purchase  of  the  roads.  In  comparing  Eu- 
ropean management  with  American  management,  there  is 
more  progressive  development  in  certain  lines  found  in 
American  railroads  than  in  any  others  in  the  world.  In- 
deed, Europeans  are  patterning  after  Americans  with  re- 
spect to  equipment  and  comfort.  It  also  seems  proper  that 
the  United  States  should  pattern  after  the  European  lines 
in  perfection  of  road-bed  and  precautions  for  safety.  But 
the  advantage  of  government  ownership  in  regard  to  all  of 
these  matters  is  not  evident,  for  England  has  a  better 
system  than  is  found  on  the  Continent,  and  still  under  pri- 


452  ECONOMICS. 

vate  management.  Many  persons  urging  government  con- 
trol of  railroads  in  the  United  States  have  failed  to  observe 
the  enormous  mileage  compared  with  that  of  some  of  the 
European  nations.  It  will  be  observed  that  the  conditions 
vary  in  different  countries,  and  consequently  the  same  rule 
will  not  apply  to  all.     (See  Table  I.) 

Laws  Controlling  Corporations. 

But  whatever  takes  place  in  regard  to  specific  industries, 
the  general  laws  controlling  corporations  need  careful 
supervision  and  enlargement.  There  should  be  more  spe- 
cific care  in  regard  to  such  matters.  It  appears,  then, 
that  something  should  be  done  respecting  corporation  regu- 
lations. Restrictions  should  be  placed  upon  methods  of 
organization,  the  granting  of  franchises,  and,  in  fact,  laws 
made  controlling  and  limiting  the  operation  of  corpora- 
tions. 

Municipal  Ownership  of  Gas-  and  Water-Works. 

It  would  seem  that  in  cities  where  water  is  furnished  for 
the  people  at  large,  it  should  be  done  by  the  city  itself 
rather  than  be  left  to  private  corporations.  The  water- 
supply  is  so  essential  to  the  sanitation,  health  and  conveni- 
ence of  all  the  people,  it  seems  to  be  a  very  improper  thing 
for  a  city  to  allow  it  to  pass  from  under  its  control.  What- 
ever is  the  expense,  whether  great  or  less  under  city  control, 
there  can  be  no  question  that  every  municipality  should 
own  and  manage  its  water-works,  regardless  of  inconveni- 
ence and  expense. 

In  regard  to  the  gas-supply,  it  is  a  great  question  whether 
or  not  the  city  should  own  and  operate  its  gas  plant.  There 
are  several  methods  to  be  observed  where  the  city  owns  its 


ECONOMICS.  453 

gas  plant.  In  the  first  place,  a  normal  price  may  be  charged 
for  the  gas  and  the  surplus  turned  into  the  public  treasury 
to  lighten  taxation.  In  the  second  place,  the  gas  may  be 
furnished  at  a  very  low  price,  the  city  neither  gaining  nor 
losing  by  the  operation.  The  third  proposition  is  a  com- 
bination of  these  two  ideas,  the  gas  being  furnished  to  the 
people  at  something  below  the  normal  rate  and  still  having 
a  surplus  for  the  treasury, — less  than  in  the  other  case. 

As  to  the  right  of  municipal  ownership,  there  can  be  no 
question.  The  streets  belong  to  the  people  at  large,  and  no 
excessive  monopoly  should  be  given  to  any  persons  without 
adequate  return.  The  city  itself  has  a  better  right  to  use 
these  streets  to  establish  its  own  industries  than  has  any 
private  corporation  or  monopoly.  There  are  many  things 
pointing  towards  the  expediency  of  the  city  ownership  of 
gas. 

Oovernment  Management  versu*  Government  Ownerihip. 

Those  who  advocate  government  ownership  state  that 
a  revenue  would  be  returned  to  the  city  which  would  bene- 
fit the  community.  Under  wise  management  this  may 
prove  true ;  but  it  sometimes  happens  that  a  deficit  occurs 
in  city  administration,  and  this  revenue  is  not  obtained. 
There  is  always  an  attendant  danger  to  business  whore 
politics  prevails  to  a  large  extent.  Until  we  reach  a  period 
where  municipal  government  shall  be  conducted  on  a  busi- 
ness basis,  there  can  be  no  assurance  that  the  gas-supply 
will  yield  a  return  to  the  city.  It  is  urged  also  that  politi- 
cal influence  will  be  lessened  by  government  ownership. 
It  is  held  that  under  private  corporations  corruption  is 
developed  and  the  city  council  is  elected  by  corrupt 
—28 


454  ECONOMICS. 

methods,  so  that  corporations  have  their  own  way ;  while 
under  municipal  ownership  this  would  disaTppear, — the 
records  would  show  whether  business  was  properly  man- 
aged and  the  funds  properly  used.  However,  unless  the  in- 
creased responsibility  would  bring  a  better  class  of  citizens 
to  act  as  officers,  there  could  scarcely  be  any  improvement 
in  this  line.  It  would  seem  that  government  control,  wisely 
administered,  would  reach  the  same  ends.  Wherever  the 
cities  have  managed  their  own  gas-works  there  has  been  a 
tendency  to  furnish  a  better  quality  of  gas,  at  reduced  rates. 
Where  good  business  methods  have  prevailed  they  have 
made  a  financial  success  of  the  enterprise ;  where  bad  busi- 
ness methods  have  prevailed  they  have  made  a  failure. 
Disposal  of  Public  Franchisss. 
One  modern  method  of  disposing  of  public  franchises 
seems  to  be  a  solution  of  the  problem  in  a  very  satisfactory 
way.  That  is,  the  putting  up  at  auction  of  all  franchises 
to  which  the  public  rights  are  granted,  and  disposing  of 
them  to  the  highest  bidder,  letting  only  to  responsible  par- 
ties. These  franchises  are  granted  for  a  limited  period  of 
time^  with  the  privilege  of  the  municipality  to  purchase 
them  at  a  normal  price,  or  to  renew,  as  it  sees  fit.  In 
addition  to  this,  the  bid  provides  for  the  payment  of  a 
certain  per  cent,  of  the  gross  proceeds  into  the  public  treas- 
ury. A  provision  is  also  made  that  the  article  furnished 
shall  be  of  a  certain  grade  and  furnished  at  a  maximum 
price.  With  these  restrictions  there  is  no  reason  why  the 
municipality  should  not  realize  the  benefits  of  the  monop- 
oly with  certainty  without  government  ownership.  Under 
present  conditions  of  most  municipal  governments  this  is 
far  preferable  to  government  ownership. 


ECONOMICS.  ^00 

Economic  Freedom  Demands  Restrictive  Laws. 
'A  great  many  people  seem  to  hold  that  while  laws  should 
be  established  for  the  control  of  civil  liberty,  the  state  has 
no  right  to  interfere  with  the  economic  life.  The  growing 
importance  of  economic  life,  however,  has  rendered  it 
the  base  of  all  modern  operations.  All  legislation  rests 
more,  in  these  days,  upon  trade  industries,  commerce,  cap- 
ital, labor,  corporations,  and  industries  in  general,  than 
upon  the  bare  fact  of  securing  civil  and  political  justice. 
The  latter  has  to  a  great  extent  already  been  secured  in  our 
own  country.  It  appears  that  industrial  liberty  or  eco- 
nomic freedom  should  be  maintained,  and  that  it  is  just  as 
essential  to  establish  some  general  laws  and  restrictions 
upon  trade  and  industry  to  secure  economic  freedom  as  it 
is  to  make  political  and  civil  laws  for  the  security  of  politi- 
cal and  civil  freedom;  and  that  this  can  be  done  without 
the  state  passing  beyond  its  legitimate  function  in  provid- 
ing for  the  general  well-being  of  the  community. 

The  Modern  Trust. 
There  has  recently  sprung  up  a  form  of  financial  organi- 
zation called  the  "trust,"  which  has  developed  stupendous 
proportions.  Within  recent  years  it  took  the  form  of  the 
organization  of  separate  corporations  into  a  pseudo  over- 
corporation.  The  pseudo  over-corporation  took  all  of  the 
corporations  of  a  given  industry  into  an  association,  issuing 
so  much  stock  to  each  or  else  giving  to  each  a  certain  pro- 
portion of  the  income  of  the  new  organization  called  the 
trust.  That  is,  the  business  of  the  various  corporations  was 
held  in  trust  by  the  super-organization,  which  might  be 
dissolved  at  any  time.  There  was  a  great  question  whether 


466  ECONOMICS. 

the  trust  was  responsible  as  an  organization  or  not,  as 
it  held  itself  ready  to  dissolve  at  any  time.  But  by  the 
power  of  law  it  has  been  forced  more  and  more  to  become 
one  large  corporation,  absorbing  into  one  definite  organiza- 
tion all  of  the  other  corporations,  the  latter  losing  their 
identity  in  the  former. 

The  progress  of  the  trust  as  it  attempted  to  absorb  all 
competing  industries  in  a  given  line  has  been  very  marked, 
and  the  rapidity  with  which  the  trusts  have  been  organized 
and  in  which  small  industries  have  been  absorbed  has  cre- 
ated alarm  in  the  minds  of  the  people.  At  the  close  of  the 
year  1897  there  were  111  trusts,  none  of  which  had  a 
smaller  capital  than  $1,000,000 ;  while  at  the  close  of  the 
year  1898,  98  more  were  formed,  with  an  aggregate  capital 
of  about  $2,000,000,000, — making  the  capital  of  all  trusts 
formed  by  the  close  of  the  year  1898  equal  to  about  $5,000,- 
000,000,  or  about  one-fifth  of  the  assessed  valuation  of  the 
taxable  property  in  the  United  States  at  the  time  of  the 
census  of  1890.  The  following  are  some  of  the  principal 
trusts  formed  during  the  past  few  years,  with  their  esti- 
mated or  known  capital:  Joint  Traffic  Association,  $1,- 
404,130,581;  Federal  Steel  Company,  1200,000,000;* 
Heading  Coal  Company,  $150,000,000;  Western  Union 
Telegraph  Company,  $95,370,000;  American  Sugar  Ke- 
fining  Company,  $73,936,000;  Standard  Oil  Company, 
$97,500,000;  Wholesale  Grocers'  Association  of  New 
England,  $75,000,000;  Central  Lumber  Company,  $70,- 
000,000;  United  States  Leather  Company,  $62,711,100; 
Chicago  and  Milwaukee  Brewers'  Association,  $60,000,- 
000  ;  New  England  Insurance  Exchange  (84  fire  insurance 

♦  The  United  States  Steel  Company  has  now  a  capitalization  of  $1,404,000,000. 


ECONOMICS. 


45T 


companies),  $58,537,167;  Steel  Kail  Association,  $50,- 
000,000;  Chemical  Combine,  $50,000,000;  Carnegie 
Steel  Company,  $35,000,000;  Consolidated  Gas  Company 
of  l^ew  York,  $35,430,060.  Some  recently  proposed  or- 
ganizations are  the  Flour  Trust,  with  a  capital  of  $150,- 
000,000;  the  Knit  Goods  Company,  with  a  capital  of 
$30,000,000 ;  and  the  Thread  Company,  with  a  capital  of 
$18,000,000.  With  the  opening  of  the  year  1899  trusts 
with  gigantic  capitalization  were  formed  with  wonderful 
rapidity,  to  the  great  alarm  of  many  people. 

The  chief  objection  urged  against  trusts  by  the  people  is, 
that  they  destroy  competition  and  crush  out  the  smaller 
concerns.  That  they  destroy  competition,  is  true  to  a  cer- 
tain extent ;  but  as  there  has  never  been  a  complete  organi- 
zation of  any  given  industry,  there  is  always  a  threatened 
competition.  And  it  is  a  fact  that  on  account  of  the  con- 
centration of  a  given  industry,  prices  are  more  stable  under 
the  organization  of  the  trust,  and  that  in  the  long  run  they 
average  lower  than  under  the  competition  of  many  small 
concerns.  The  wants  of  the  community,  both  in  manufac- 
tures and  trade,  are  more  carefully  estimated  by  this  means 
of  social  organization. 

That  they  crush  out  smaller  concerns,  is  true ;  and  while 
the  people  at  large  may  reap  a  benefit  in  reduced  prices 
and  more  stable  business  life  by  the  crushing  out  of  the 
small  concerns,  it  is  a  great  detriment  to  the  local  com- 
munities where  these  concerns  are  established.  In  a  West- 
ern town  there  was  situated  a  barbed-wire  factory — an 
independent  concern,  which  had  grown  up  from  a  very 
small  beginning  until  it  employed  200  men  and  did  a  very 


458  ECOKOMICS. 

large  amount  of  business.  The  trust  absorbed  this  institu- 
tion into  its  main  body.  The  object  of  the  trust  was  to 
control  the  output  so  as  to  prevent  prices  from  declining, 
as  they  had  reached  such  a  low  basis  that  profits  were  very 
small,  and  they  thus  desired  to  hold  to  monopoly  prices  and 
monopoly  profits.  What  was  the  result  ?  The  owners  of 
the  local  plant  received  a  large  sum  for  their  factory, 
indeed  much  larger  than  the  actual  value  of  the  plant  under 
ordinary  business  prospects  would  warrant.  It  will  be  no- 
ticed that  trusts  always  pay  high  for  local  enterprises.  This 
means  that  they  anticipated  making  larger  returns  than 
were  made  by  the  smaller  concerns  when  worked  separately. 
It  will  be  observed,  however,  that  this  can  be  done  only  by 
the  reduction  of  expenditures  and  by  the  establishment  of 
monopoly  prices.  It  is  a  mistake  to  suppose  that  because  an 
organization  controls  an  entire  industry  it  can  charge  such 
prices  as  it  pleases.  Yet  many  investors  in  stock  of  trusts 
called  "industrials"  are  led  to  suppose  this  to  be  true.  The 
fact  is,  after  they  become  complete  monopolies  they  must 
be  controlled  by  monopoly  prices  and  monopoly  profits 
and  threatened  competition.  (See  Monopoly  Profits, 
supra.)  Another  result  is,  that  a  large  amount  of  money 
has  come  into  the  town  which  will  immediately  seek  other 
investments, — probably  in  the  town  itself;  and  while  the 
trust  destroys  one  business  in  the  town,  it  leaves  a  large 
amount  of  free  capital  to  invest  in  other  businesses. 
Another  result  in  the  case  in  point  which  is  more  detri- 
mental to  the  progress  of  the  town  is,  that  200  men  with 
their  families,  probably  1,000  persons  in  all,  are  thrown 
out  of  employment.     Many  of  these  will  leave  for  other 


ECONOMICS.  459 

places,  and,  unless  as  stated  other  businesses  spring  up, 
trade  will  fall  off  with  the  merchants  and  a  general  detri- 
ment to  the  community  will  ensue.  This  local  destruction 
of  business  is  one  of  the  greatest  evils  of  the  modern  trust ; 
jet  even  it  may  have  a  compensation  in  the  fact  that  a 
large  amount  of  capital  is  freed  for  new  enterprises, — and 
it  is,  after  all,  the  free  capital  of  the  community  that  makes 
a  business. 

Another  objection  to  the  modern  trust  made  by  the  peo- 
ple is,  that  the  power  of  concentrated  capital  to  influence 
legislation  is  great.  'No  doubt  this  is  the  greatest  danger 
in  connection  with  it.  It  has  this  power  if  it  desires  to 
use  it.  Yet  the  danger  here  is  not  as  great  as  it  might 
appear,  for  when  a  trust  controls  the  entire  output  of  any 
industry  it  has  less  desire  to  control  legislation  in  its  own 
interest  than  have  several  large  competing  concerns  which 
attempt  to  take  advantage  of  one  another.  Nevertheless, 
because  they  are  never  free  from  competition,  as  com- 
petition is  between  corporation  and  corporation  and  trust 
and  trust,  there  may  still  be  a  desire  for  influencing  legis- 
lation in  various  forms. 

It  is  objected  that  trusts  raise  prices  by  restricting  pro- 
duction, and  keep  down  wages.  The  fact  is,  the  trusts  to 
date  have  paid  as  high  wages  as  the  lesser  corporations; 
and  when  it  is  observed  that  there  is  an  opportunity  to  pay 
higher  wages  there  than  elsewhere,  no  doubt  wage-earners 
will  receive  their  full  share  of  the  business.  Wages  are 
certainly  higher  in  proportion  to  interest  and  profits  under 
the  higher  organization  of  industry  than  under  the  lower, 
where  there  were  many  competing  groups.    The  real  truth 


460  ECONOMICS. 

about  the  trust  is  that  it  becomes  a  great  corporation  which 
will  terrify  us  by  its  size,  but  which  may  be  regulated  hj 
careful  legislation  so  that  its  dangers  may  be  turned  into 
benefits  to  the  people. 

The  United  States  enacted  an  anti-trust  law  in  1890, 
which  declares  that  combinations,  or  contracts  in  the  form 
of  trusts  or  otherwise,  or  even  a  conspiracy  against  trade 
or  commerce  throughout  the  several  states  of  the  Union 
or  with  foreign  nations,  was  illegal ;  and  insisted  that  every 
person  or  combination  of  persons  who  attempt  to  monopo- 
lize any  particular  trade  or  commerce  among  the  several 
states  is  guilty  of  a  misdemeanor.  Many  states  also  have 
attempted  to  make  laws  against  trusts,  and  have  succeeded 
at  least  in  bringing  before  the  people  the  subject  of  trusts, 
and  in  creating  a  great  deal  of  discussion  as  to  its  nature, 
benefits,  and  dangers. 

"  Government  by  Injunction." 
The  anti-trust  laws  and  interstate  commerce  act  have 
been  responsible  for  introducing  a  new  form  of  regulation, 
called  "government  by  injunction."  It  is  simply  the  en- 
largement of  the  restraint  which  is  exercised  to  prevent 
certain  acts  of  individuals  which  are  contrary  to  law.  It 
is  used  largely  for  the  control  of  labor  organizations.  This 
has  been  extended  to  apply  to  parties  engaged  in  strikes. 
If  strikers  conduct  themselves  so  as  to  restrict  trade  or 
commerce  among  the  states,  they  are  guilty  of  violation  of 
the  law.  The  injunction  was  used  in  1894  merely  to 
facilitate  the  application  of  these  laws  and  to  prevent  their 
violation.  The  anti-trust  law  of  the  United  States  and  of 
the  various  states  would  include  labor  organizations  under 


ECONOMICS.  461 

its  operations;  therefore  these  laws  are  far-reaching,  and 
have  a  tendency  to  show  the  magnitude  of  the  trust  ques- 
tion and  its  regulation. 

Most  of  the  trusts  formed  are  broken  down  or  will  break 
down;  many  are  being  formed  now  on  a  fictitious  basis, 
developing  a  great  volume  of  stocks  and  industrials  which 
sooner  or  later  must  lead  many  to  failure.  Many  which 
survive  the  shock  of  public  opinion  or  adverse  legislation 
will  pass  into  the  form  of  gigantic  corporations,  whose 
actions  will  be  amenable  to  the  law.  While  the  rapid 
development  of  trusts  has  caused  unnecessary  alarm^ 
they,  like  other  forms  of  industrial  life,  need  regulating 
by  the  laws  of  the  United  States  and  the  various  states 
thereof.  The  courts  and  the  legislative  power,  if  properly 
directed,  will  certainly  regulate  trusts  so  that  they  will 
prove  a  benefit  rather  than  a  detriment  to  the  people  at 
large.  A  uniform  tax,  if  properly  levied,  would  bring 
these  organizations  into  subjection  to  the  will  of  the  people. 
A  tax  which  would  destroy  the  extra  business  profit  gained 
thereby  would  be  not  only  constitutional,  but  effective  in 
the  regulation  of  trusts.  It  would  be  constitutional  be- 
cause it  would  be  attacking  a  certain  form  of  trusts,  and 
such  a  tax  would  come  in  under  the  police  regulation. 
It  is  a  question  which  the  modern  student  must  examine 
very  carefully.  Whether  eventually  it  will  lead  to  social- 
ism, no  one  can  tell;  but  the  author  apprehends  that  it 
will  not. 

State  Socialism.* 

Some  go  so  far  as  to  advocate  government  ownership 
of  all  industries,  all  lands,  mines,  manufactories,  means 

♦  See  Chapter  vni,  Bk.  n,  Part  Q. 


462  ECONOMICS. 

of  transportation,  stores, — and  in  fact  that  all  industries 
should  be  placed  under  the  state  management,  and  that  all 
persons  should  be  employed  by  the  state,  each  then  receiv- 
ing his  remuneration  from  one  central  authority.  This 
is  not  at  all  necessary  for  the  security  of  economic  or  in- 
dustrial freedom.  It  is  also  accompanied  by  many  dan- 
gers, from  the  fact  that  no  formula  will  cure  the  selfish- 
ness of  human  beings,  and  that  state  socialism  wo\ild 
be  merely  the  means  of  concentrating  such  selfishness. 
Power  given  to  the  people  in  this  manner  to  regulate  all 
industries  would  end  only  in  the  few  regulating  the  many^ 
with  the  result  of  a  revolution  on  the  part  of  the  many. 

Significance  of  Public  Economics. 

Public  economics  have  become  very  important  in  mod- 
ern industrial  life.  It  is  impossible  to  consider  private 
economics  without  coming  in  contact  with  the  relations 
of  the  state  to  trade  and  industry.  'No  persons  can  justly 
be  considered  well  versed  in  political  economy,  nor  indeed 
understand  the  full  relations  of  the  people  to  one  another, 
without  a  full  consideration  of  public  economics. 


ECONOMICS.  463 


CHAPTEE  III. 

TAXATION  AND  REVENUE. 

Relation  of  Taxation  to  Private  Economics. 
The  question  of  taxes  is  one  of  distribution,  generally 
speaking,  because  it  must  be  considered  as  one  of  the  ways 
in  which  the  surplus  product  is  disposed  of.  Also,  it  may 
be  considered  as  the  means  of  a  part  of  production,  inas- 
much as  it  stimulates  production  and  the  producer  must 
enter  it  as  one  of  his  necessary  expenses.  Burdensome 
taxes  may  oppress  industries  and  prevent  the  development 
of  economic  life.  A  tax  that  is  not  burdensome  may  do 
nothing  more  than  stimulate  the  extra  energy  necessary 
for  the  increased  production  to  cover  the  amount  of  the 
taxes. 

Taxation  a  Means  of  Improving  Economic  Processes. 

Because  of  the  expenditures  of  the  government  in  main- 
taining roads,  promoting  justice  and  equality,  and  pro- 
tecting life  and  property,  taxes  are  among  the  best  invest- 
ments for  the  improvement  of  economic  processes.  While 
we  may  speak  of  private  economics  and  the  great  laws  of 
supply  and  demand,  we  must  understand  that  these  laws 
would  not  develop  without  proper  governmental  protection, 
and  that  taxes  are  absolutely  essential  for  the  development 
of  all  economics.  Especially  is  this  so  when  we  consider 
public  economics;  for  we  find  the  tax  system  closely  re- 
lated to  public  economics.     We  cannot  escape  its  use  or 


464  ECO]S"OMICS. 

its  importance  under  such  circumstances.  Taxes  should 
be  administered  with  a  great  deal  of  care,  and  their  as- 
sessment and  collection  and  expenditure  more  carefully 
guarded  than  almost  any  other  public  institution. 

Definitions. 

Taxes  have  been  defined  as  forced  contributions  of  the 
people  for  the  support  of  the  government.  They  are  not 
debts  in  the  ordinary  sense  of  the  word,  for  they  are  not 
contracted  by  the  payer.  Neither  are  they  paid  for  pro- 
tection of  life  and  property,  but  are  placed  in  the  general 
fund  for  government  disbursement.  As  there  is  only  one 
party  to  the  transaction,  they  are  called  one-sided  trans- 
fers, or  forced  contributions. 

Judge  Cooley  defines  taxes  as  "being  the  enforced  pro- 
portional contribution  of  persons  and  property  levied  by 
the  authority  of  the  state  for  the  support  of  the  government, 
and  for  all  public  needs.''  This  definition  upon  the  whole 
is  correct  from  an  economic  standpoint,  with  the  exception 
that  taxes  are  sometimes  levied,  not  for  the  purpose  of  pub- 
lic need,  but  for  private  appropriation ;  but  if  we  include 
in  all  public  needs  all  public  expenses,  or  those  funds 
which  the  government  needs  for  carrying  out  all  the  func- 
tions of  government,  then  the  definition  is  correct.  For, 
indeed,  the  constitution  of  ^ew  York  provides  that  "the 
assent  of  two-thirds  of  the  members  elected  to  each  branch 
of  the  legislature  shall  be  requisite  to  pass  a  bill  appropri- 
ating the  public  moneys  for  local  or  private  purposes." 

Paul  Leroy-Beaulieu,  in  his  Traite  de  la  Science  des 
Finances,  defines  taxes  in  these  simple  words:  "Taxes 
are  simply  contributions  demanded  of  citizens  as  their 


ECOITOMICS. 


465 


share  of  the  expenses  of  the  government."  And  in  a  more 
elaborate  manner,  he  continues  on  a  subsequent  page: 
^^Every  contribution  regularly  demanded  of  the  citizens  by 
the  stated  authorities  of  the  land  for  meeting  the  expenses 
of  the  government,  is  a  tax."  Again,  if  we  are  to  take 
this  definition  in  its  full  meaning,  we  must  include  in  that 
term  "expenses  of  the  government,"  all  expenses  of  the 
government  in  fulfilling  its  legitimate  function  as  a  rep- 
resentative of  the  nation.  We  must  also  say,  in  addition 
to  this,  that  taxes  are  sometimes  levied  for  the  purpose 
of  encouraging  manufactures,  as  in  the  case  of  the  pro- 
tective tariff;  for  the  sake  of  rendering  void  a  law,  as  in 
the  case  of  the  Federal  taxes  on  state  bank  notes,  for  sup- 
pressing their  circulation ;  or,  in  the  case  of  the  extensive 
taxes  on  whisky  and  tobacco,  for  the  purpose  of  suppress- 
ing vice.  So  that,  in  the  definition,  taxes  may  mean  some- 
thing more  than  the  collection  of  revenue  for  the  bare 
support  of  the  government  machinery. 

There  is  a  legal  fiction  that  taxes  are  given  in  exchange 
for  protection;  but  it  will  be  noticed  that  the  sovereign 
state  demands  this  contribution  of  citizens  regardless  of 
any  value  which  may  come  to  the  citizen  in  return  for  the 
contribution.  The  law,  itself,  always  fails  to  recognize 
in  taxation  any  of  the  principles  which  apply  to  purchase 
or  sale  and  to  contracts  and  debts  resulting  therefrom. 
But  do  not  taxes,  in  an  indirect  way,  benefit  the  tax-payer  ? 
Certainly  they  do,  but  not  in  a  way  similar  to  that  implied 
in  a  contract  arising  through  purchase  or  sale.  While 
there  is  but  one  party  to  the  proceeding,  the  other  party 
may,  in  an  indirect  way,  on  account  of  the  keeping  up 


466  Ecoi^^oMics. 

of  social  organization  and  the  improvement  of  the  means 
of  creating  and  holding  property,  reap  a  just  reward  in 
this  general  return.  But  suppose  a  person  says,  "I  do  not 
want  to  be  taxed,  and  I'll  not  enter  into  this  contract;  I 
don't  want  to  be  protected, — I  can  take  care  of  myself." 
Does  the  state  pay  any  attention  to  him,  and  release  him 
from  his  share  of  the  obligation  ?  No ;  he  is  a  part  of  the 
great  social  organization,  which  has  determined  by  long 
custom,  common  consent,  and  legal  authority,  that  a  cer- 
tain amount  of  funds  shall  be  collected  from  each  indi- 
vidual citizen  according  to  his  person  or  his  property, 
and  that  these  common  funds  shall  be  expended  for  the 
general  use  of  the  community;  and  as  long  as  he  remains 
in  a  community  the  individual  must  pay  the  taxes. 

There  is  sometimes  an  assertion  made  in  this  connec- 
tion, that  taxes,  though  paid  into  the  public  treasury,  will 
in  time  turn  to  the  pockets  of  the  tax-payer.  But  this  is 
a  false  supposition,  if  we  try  to  make  it  specific.  Suppose 
a  farmer  pays  $50  in  taxes.  In  order  to  get  this  $50  he 
sold  the  produce  off  his  farm.  ^N'ow,  if  the  government 
does  not  lay  out  the  $50  in  farm  produce,  it  will  not  revert 
to  the  farmer.  Suppose  the  government  does  expend  $50 
for  this  same  farmer:  it  will  do  it  by  purchasing  $50 
worth  of  produce;  that  is,  the  tax-collector,  the  agent  of 
the  government,  says:  ^^You  may  have  your  money  back 
by  paying  me  its  equivalent,  $50  in  produce."  Upon  this 
basis  we  have  an  extended  argument  that  the  keeping  of 
soldiers  and  sailors  will  increase  the  demand  for  products, 
and  thus  will  enhance  the  general  welfare  of  the  commu- 
nity.    But  this  is  only  a  nominal  market  and  not  a  real 


ECONOMICS.  467 

market.  To  keep  useless  industries  for  the  sake  of  enlarg- 
ing the  market  is  a  false  theory.  The  only  way  in  which 
taxes  can  help  industry  by  the  expenditure  of  funds,  is 
to  make  a  better  system  of  communication,  to  keep  better 
order,  or  to  bring  about  favorable  conditions  of  business. 
So,  also,  for  the  protection  idea.  The  person  who  pays 
the  least  taxes  may  sometimes  require  the  greater  protec- 
tion of  life  and  property,  and  he  who  pays  most  may  be 
in  a  position  to  better  protect  himself  and  his  property 
than  he  who  pays  little. 

Purposes  of  Taxation. 

Taxation,  then,  though  it  is  easily  defined  and  seems  a 
simple  thing,  becomes  of  great  magnitude  when  we  begin 
to  inquire  into  the  philosophy  of  its  existence,  into  all  the 
relations  to  which  it  gives  rise  between  the  governing  and 
the  governed.  It  is  a  question  of  supreme  importance, 
of  far-reaching  consequences.  "  Taxation  may  create 
monopolies,  or  it  may  prevent  them ;  it  may  diffuse  wealth, 
or  it  may  control  it ;  it  may  promote  labor  or  equality  of 
rights,  or  it  may  tend  to  the  establishment  of  tyranny  and 
despotism ;  it  may  be  used  to  bring  about  reform,  or  it  may 
be  used  to  aggravate  existing  grievances  and  foster  dis- 
sensions between  classes;  taxation  may  be  so  contrived 
by  the  skillful  hand  as  to  give  free  scope  and  every  oppor- 
tunity for  the  creation  of  wealth  or  for  the  advancement 
of  all  true  interests  of  states  and  cities,  or  it  may  be  so 
shaped  by  ignoramuses  as  to  place  a  dead  weight  upon  a 
community  in  the  race  for  industrial  supremacy."  (R. 
T.  Ely.) 

Taxes,  then,  have  for  their  purpose  the  general  good 


468  ECONOMICS. 

of  the  community,  and  so  long  as  they  tend  to  give  this 
and  are  levied  with  a  fair  measure  of  equality,  they  sub- 
serve their  purpose  and  affirm  their  right  to  existence. 
When  taxes  are  once  paid  into  the  treasury  of  the  govern- 
ment, their  disbursement  may  take  place,  not  only  for  the 
expenses  of  the  government  machinery,  but  also  for  the  pro- 
tection of  industries  as  a  means  of  directing  society  in 
certain  channels,  and  for  general  public  improvement. 
The  whole  community  is  to  be  benefitted,  directly  or  in- 
directly. (See  Kentucky  Court  of  Appeals  Case,  Cooley, 
489.) 

Canons  of  Taxation. 

Although  taxation  is  comparatively  modern,  we  have 
found  that  systems  have  developed  along  with  the  progress 
of  modern  government.  They  have  been  practiced  long 
enough  to  develop  a  certain  number  of  principles  which 
lie  at  the  foundation  of  the  philosophy  of  good  govern- 
ment. 

Many  of  these  principles  were  advocated  by  Adam 
Smith,  and  have  been  reiterated  by  all  writers  on  taxation 
from  his  time.  The  first  general  principle  is,  that  the 
subject  of  every  state  ought  to  contribute  to  the  support 
of  the  government  as  nearly  as  possible  in  proportion  to 
his  respective  ability,  this  ability  being  estimated  by  the 
amount  of  revenue  he  enjoys  under  the  protection  of  the 
state.  And  by  this  last  sentence  it  is  understood  that,  liv- 
ing within  and  under  the  protection  of  the  state,  the 
amount  of  revenue  which  he  enjoys  is  to  be  an  index  of 
his  ability  to  pay  for  the  support  of  the  general  good; 
or  as  Mill  says,  "  Equal  taxation  is  equality  of  sacrifice." 

People  as  a  rule  do  not  like  to  be  taxed,  because  they 


EcoisroMics.  469 

do  not  receive  an  immediate  and  tangible  return  for  what 
they  pay  out,  as  they  do  in  the  case  of  the  exchange  of  com- 
modities. The  return  which  they  get  is,  indeed,  very 
general  and  indirect.  But  there  is  an  indirect  return 
through  the  general  good  of  society  of  which  the  individual 
tax-payer  is  a  member. 

They  also  object  to  the  payment  of  taxes  because  they 
imagine  that  they  are  unjust.  And,  indeed,  no  one  ever 
knew  a  tax  without  a  grain  of  injustice.  John  Sherman 
said  in  one  of  his  speeches  in  the  Senate,  "I  never  knew 
a  tax  that  was  not  odious  and  unpopular  to  the  people 
who  pay  it" ;  while  Mr.  McCulloch  has  succeeded  in  utiliz- 
ing two  of  Pope's  lines  as  follows : 

"  Whoever  hopes  a  faultless  tax  to  see, 

Hopes  what  ne'er  was,  is  not,  and  ne'er  shall  be." 

And  doubtless  this  is  a  successful  application  of  poetry 
to  economics.  But  still,  Sherman's  strong  assertion  needs 
some  qualification,  for  there  certainly  is  a  difference  be- 
tween a  popular  and  an  unpopular  tax ;  and  while  no  one 
really  enjoys  taxation,  not  all  taxes  are  odious.  But  the 
liability  to  fraud  leads  a  man  to  imagine  that  he  is  paying 
more  than  he  ought,  and  that  there  is  a  way  of  escape. 
This  causes  dissatisfaction,  and  a  tendency  on  the  part  of 
many  to  evade  taxation.  However,  it  should  be  stated  that 
a  fax  should  be  quite  satisfactory  to  the  people  who  pay  it, 
and  should  be  so  assessed  as  to  give  the  least  possible 
opportunity  for  fraud. 

Another  well-known  principle  is,  that  taxes  ought  to 
be  certain,  and  not  arbitrary,  as  to  quantity,  time  of  pay- 
ment,  and  manner  of  payment.     In  feudal  times,   and 

—29 


470  ECONOMICS. 

sometimes  indeed  in  modern  history,  the  principles  of 
taxation  have  been  violated  in  this  respect.  Kings  and 
potentates  have  levied  taxes  suddenly,  and  without  warn- 
ing, and  collected  them  in  an  arbitrary  and  offensive  man- 
ner, thus  violating  this  principle.  But  modern  assessments 
have  tended  to  recognize  all  of  these  principles,  as  to  the 
certainty  of  taxation,  and  a  fixed  time  of  payment,  and 
have  specified  clearly  the  manner  in  which  these  taxes 
must  be  paid. 

A  third  principle  is,  that  taxes  ought  to  be  levied  in  the 
manner  most  suitable  to  the  payer;  that  is,  the  time  and 
manner  of  payment  should  be  as  best  suit  his  convenience. 
The  preceding  principle  holds  to  the  definiteness  of  pro- 
cedure, while  the  latter  holds  that  this  definiteness  should 
be  so  arranged  as  to  best  suit  the  convenience  of  the  tax- 
payer. Thus,  it  is  more  convenient  for  the  farmer  to  pay 
his  taxes  soon  after  he  receives  returns  from  his  harvested 
crops;  persons  receiving  wages  by  the  week  or  by  the 
month  could  more  readily  pay  their  taxes  quarterly;  and 
a  day-laborer  finds  the  most  convenient  to  pay  is  that 
which  he  pays  daily  through  a  tax  on  commodities.  Gen- 
erally, enlightened  nations  are  beginning  to  observe  this 
rule  to  a  considerable  extent,  for  we  find  that  the  con- 
venience of  the  tax-payer  is  consulted  in  the  times  set 
for  the  payment  of  taxes. 

One  of  the  most  important  of  the  principles  of  taxation 
is,  that  taxes  ought  to  take  as  little  as  possible  out  of  the 
pocket  of  the  tax-payer  over  and  above  what  is  paid  into 
the  public  treasury.  This  is  an  argument  in  favor  of  the 
careful  expenditure  of  funds,  as  well  as  the  proper  method 


ECONOMICS.  471 

of  assessment  and  collection  of  them.  An  improper  tax 
may  lead  to  great  injustice  by  taking  unnecessarily  from 
the  pockets  of  the  people  what  ultimately  reaches  the 
treasury,  a  surplus  that  is  expended  in  the  collection  of 
the  tax,  or  that  reaches  the  pocket  of  corrupt  officials.  Or 
again,  if  a  greater  assessment  is  made  than  is  required 
to  meet  public  needs,  it  results  in  heaping  up  in  the  public 
treasury  a  large  amount  of  funds,  which  may  lead  to  ex- 
travagance, and  that  in  turn  lead  to  injustice. 

The  economic  idea  of  taxation  is,  that  the  fund  collected 
as  tax  is  to  be  more  profitably  expended  by  the  govern- 
ment than  it  would  be  if  left  to  private  enterprise.  Being 
drawn  from  the  combined  earnings  of  all  the  citizens,  the 
tax  is  to  be  so  handled  that  it  will  yield  a  larger  economic 
return  than  the  tax  itself;  and  also  a  larger  return  than 
the  money  would  yield  if  handled  in  small  amounts  by 
the  individuals  themselves.  Sometimes  taxes  have  been 
so  heavy  as  to  be  little  better  than  robbery.  So  much  was 
taken  out  of  the  pockets  of  the  people  that  it  burdened  the 
industries  which  they  tried  to  carry  on,  and  thus  the  taxes 
were  a  positive  detriment  to  the  entire  community.  But 
in  this  connection  it  may  be  said  that  the  least  tax  is 
not  always  the  best  tax;  for,  while  it  is  a  very  bad  plan 
to  have  an  extravagant  tax,  a  niggardly  tax  which  barely 
supports  the  functions  of  the  government  is  a  detriment 
to  the  progress  of  the  people.  Correct  financiering  will 
avoid  an  overflowing  treasury  and  a  lavish  expenditure, 
or  a  government  bordering  on  paternalism,  on  the  one 
hand;  and  on  the  other  it  will  avoid  an  empty  treasury, 
and  a  meager  outlay  that  barely  keeps  the  government  in  a 


472 


ECONOMICS. 


proper  existence  and  does  nothing  for  the  general  welfare 
of  the  people.  Thus,  the  building  of  bridges,  public  parks, 
and  highways,  the  development  of  the  systems  of  super- 
vision and  inspection  which  enhance  the  power  of  economic 
society,  can  all  be  carried  on  better  under  the  direction  of 
the  general  government  than  they  would  if  left  to  the 
haphazard,  irresponsible,  irregular  ways  of  individuals. 
Just  and  Equitable  Taxation. 
A  great  deal  has  been  said  about  just  and  equitable  taxa- 
tion. And  these  indefinite  terms  have  led  to  a  large  meas- 
ure of  senseless  discussion.  Doubtless,  a  just  and  equita- 
ble taxation  is  the  one  least  burdensome,  although  these 
taxes  cannot  fall  equally  upon  all  individuals.  There  must 
be  discrimination.  The  basis  of  operation  should  always 
rest  upon  equality  of  sacrifice,  and  should  never  involve 
unnecessary  taxation  of  anyone.  It  is  said  that  there  is 
a  tendency  in  taxes  to  move  along  the  line  of  least  resist- 
ance ;  which,  if  it  be  true,  means  that  somebody  pays  more 
than  his  share,  while  others  escape.  Owing  to  the  nature 
of  taxation,  it  having  sprung  up  irregularly  through  the 
development  of  society,  it  has  been  a  very  difficult  matter 
to  adjust  it  so  that  each  one  should  bear  his  own  proper 
share  of  the  expenses  of  the  government.  Taxes  were  first 
paid  by  the  weak  and  those  unable  to  resist  them.  Indeed, 
to-day  it  may  be  said  that  of  all  the  great  questions  before 
the  American  people,  that  of  equal  and  just  taxation  is  the 
greatest.  Our  system  has  been  in  confusion  for  a  period  of 
years,  and,  as  time  develops,  we  see  very  little  order  com- 
ing out  of  the  chaos.  We  need  a  thorough  revision  of  our 
tax  system,  which  shall  combine  harmony,  simplicity,  and 
proper  discrimination  in  all  assessments  and  levies. 


ECONOMICS. 


473 


Incidence  of  Taxation. 

A  subject  wliicli  has  caused  a  great  deal  of  discussion 
in  the  theory  of  taxation,  and  about  which  there  is  much 
controversy  to  this  day,  as  it  is  still  an  unsettled  question, 
is  that  of  the  "  Incidence  of  Taxation."  By  it  we  indi- 
cate or  determine  upon  whom  the  tax  ultimately  falls.  A 
tax  is  sometimes  levied  upon  one  person  and  seemingly 
paid  by  him,  but  in  reality  has  been  shifted  to  another; 
and  the  incidence  of  taxation  answers  only  one  question, 
viz. :  Upon  whom  does  the  tax  ultimately  fall  ?  A  tax 
may  be  borne  by  the  person  upon  whom  it  is  levied,  or  it 
may  be  shifted  to  others^  who  in  turn  may  shift  it  to  a 
third  party.  And  this  shifting  may  be  done  either  know- 
ingly or  unknowingly  by  the  person  who  shifts.  We 
should  carefully  discriminate  between  shifting  and  evasion, 
for  evasion  is  simply  a  failure  to  pay  a  tax  at  all  by 
avoiding  it,  while  shifting  is  the  process  of  referring  the 
tax  to  others  to  pay.  But  in  this  respect  we  do  not  at  all 
consider  the  effect  of  taxation,  but  merely  upon  whom  the 
taxes  fall.  It  is,  then,  a  question  of  great  importance,  for 
indeed  upon  it  the  whole  theory  and  practice  of  modern 
taxation  rest. 

The  theory  was  discussed  as  early  as  1651  by  Hobbs, 
in  his  Leviathan,  who  advocated  a  general  excise  so  that 
those  who  paid  taxes  would  not  f-eel  them  a  burden,  not 
knowing  when  they  pay  them  nor  how  much  they  pay. 
And  Cradock  holds  that  taxes  should  fall  so  that  the 
burden  will  be  borne  insensibly  by  the  tax-payers.  And 
Thos.  Mun,  in  1664,  held  that  in  proportion  as  the  nec- 
essaries of  life  increase  in  value,  so  the  rate  of  w^ages  will 
rise,  and  taxes  will  be  shifted  accordingly  from  the  wage- 


474  ECOKOMICS. 

earner  to  the  employer  and  tlie  rich.  Sir  William  Petty 
held,  in  1672,  that  under  such  circumstances  the  employ- 
ing producer  will  bear  the  taxes  because  the  incidence 
falls  on  him.  The  question  received  much  discussion 
from  time  to  time,  and  has  been  revived  of  late  by  Mr. 
Seligman,  Mr.  Eoss,  and  others.  A  careful  inquiry  into 
this  principle  will  show  us  that  many  of  our  so-called 
direct  taxes  may  in  time  be  shifted  as  are  the  so-called 
indirect  taxes;  so  that  really  the  distinction  between  di- 
rect and  indirect  taxes  is  largely  in  the  mind  of  the  legis- 
lator as  to  what  he  intends  shall  be  direct  and  indirect, 
rather  than  in  the  practice  of  the  tax  itself. 

The  poll,  or  capitation  tax,  must  fall  upon  the  indi- 
vidual upon  whom  it  is  laid,  and  cannot  be  shifted,  except 
when  it  falls  upon  the  wage-earner,  and  then  it  will  not 
be  shifted  unless  it  falls  upon  the  margin  of  his  necessary 
subsistence.  That  is,  when  wages  are  below  the  nominal 
rate  and  taxes  are  laid  upon  wages,  they  will  be  shifted 
to  the  employer ;  when  wages  are  above  the  nominal  rate, 
taxes  upon  the  wage-earner  will  be  borne  by  him. 

Taxes  upon  inheritances  and  bequests  cannot  possibly 
be  shifted ;  the  property  is  in  sight,  and  it  must  yield  to 
the  return  of  the  levy.  An  internal  tax  may  or  may  not 
be  shifted,  though  in  the  greater  majority  of  cases  it  is 
shifted  in  whole  or  in  part.  The  tax  on  imports  is  gen- 
erally called  an  indirect  tax,  and  as  a  general  rule  it  will 
be  shifted  in  whole  or  in  part,  although  exact  determina- 
tion will  depend  upon  each  individual  case.  The  tax  on 
monopolies  cannot  be  shifted,  except  in  special  cases. 

The  income  tax,  though  a  direct  tax  in  theory,  may  fre- 


ECONOMICS.  475 

quently  be  shifted  to  others.  Take,  for  example,  the  in- 
come tax  of  England,  which  is  a  combination  of  taxes  on 
separate  categories  of  income,  and  it  happens  that  it  is 
merely  a  tax  on  gross  revenue  or  gross  receipts;  and  in 
such  cases  it  is  generally  true  that  the  income  tax  follows 
the  movement  of  other  taxes  in  regard  to  incidence.  In  a 
case  where  a  tax  is  laid  on  pure  income,  it  is  really  a  tax 
on  economic  rent  added  to  the  tax  on  net  profits  and  the  tax 
on  wages.  Now,  we  know  that  taxes  on  economic  rent 
and  net  profits  cannot  be  shifted,  except  in  the  case  of 
wage-earners,  and  it  will  have  a  tendency  to  stay  where  it 
is  placed  in  regard  to  wage-earners.  E'evertheless,  these 
are  only  tendencies,  and  we  have  no  absolute  assurance 
that  an  income  tax  in  a  country  where  we  find  no  pure 
income  will  remain  where  it  is  put. 

E^ow  the  difficulty  in  all  taxation  is  not  found  in  the 
fact  that  some  taxes  can  be  shifted  and  others  cannot,  but 
it  is  in  knowing  just  when  taxes  will  be  shifted  and  when 
they  will  not,  so  that  we  can  understand  upon  whom  the 
taxes  will  fall,  and  thus  double  taxation  and  unjust  levies 
be  avoided.  If  a  person  desires  to  reach  certain  members 
of  society  directly,  let  him  choose  the  group  of  taxes  in- 
cluding those  on  monopoly,  net  profits,  inheritances,  and 
certain  forms  of  property  and  income.  If  he  desires  to 
reach  persons  indirectly  and  have  taxes  paid  unawares  by 
the  payer,  let  him  choose  taxes  on  commodities,  in  the 
shape  of  import  duties,  special  excise  duties,  licenses,  and 
taxes  on  gross  receipts  and  corporations. 
Classification  of  Taxes. 

Perhaps,  before  we  go  further  into  this  discussion,  it 
will  be  a  good  plan  to  outline  briefly  the  various  kinds  of 


476  ECONOMICS. 

taxes  in  common  use  in  our  country,  and  generally  through- 
out other  countries.  The  first  great  division  of  taxes  is 
in  respect  to  direct  and  indirect  taxes.  It  must  be  stated 
that  this  classification  is  of  comparatively  little  value  as 
the  incidence  of  taxation  becomes  better  understood.  It  is 
of  more  difficulty  to  determine  what  is  a  direct  tax. 

Direct  taxes  are  those  supposed  to  fall  immediately  upon 
the  person  who  ultimately  pays  them.  They  have  their 
various  advantages :  they  are  said  to  promote  good  citizen- 
ship, because  the  person  who  pays  knows  to  what  extent 
he  has  paid,  and  for  what  purpose,  and  having  paid  so 
much  into  the  treasury  he  will  follow  it  more  closely  to 
see  that  it  is  justly  expended  than  he  would  in  many  cases 
where  ho  does  not  know  how  much  he  has  paid  nor  for 
what  purpose. 

Direct  taxes  are  said  to  be  less  expensive  than  indirect. 
In  1881  the  cost  of  collecting  the  taxes  on  commodities 
was  estimated  at  5.13  per  cent.,  while  the  cost  of  raising 
the  revenue  from  direct  taxes  in  1876  was  3.5  per  cent. 
In  Prussia,  in  1860,  the  direct  taxes  cost  4  per  cent,  and 
the  indirect  taxes,  with  the  exception  of  the  Salt  Monopoly, 
cost  12  per  cent.  In  1883  and  1884  the  cost  from  direct 
taxes  was  7  per  cent.,  while  those  revenues  from  indirect 
taxes  had  fallen  in  cost  to  9J  per  cent. 

Poll  Tax. — The  poll  tax,  as  is  indicated  by  its  name, 
falls  upon  the  individual.  It  is  an  old  form  of  taxation, 
arising  from  feudal  times  out  of  service  to  the  feudal 
master.  There  is  a  renewal  of  this  old-time  service  when 
the  commissioner  summons  me  to  appear  on  the  street  at 
a  certain  hour  of  the  morning  with  a  shovel  to  work  out 
my  road  tax ;  it  is  a  reminder  of  the  old  feudal  regime. 


ECONOMICS.  477 

A  great  many  object  to  the  poll  tax  because  if  a  person 
is  poor  and  unable  to  pay  it  there  is  danger  of  his  being 
reduced  to  poverty  and  then  relegated  to  the  ranks  of 
paupers  and  criminals;  it  is  idle  to  collect  taxes  of  this 
class  to  keep  up  almshouses  and  prisons,  while  we  are 
making  the  class  larger  all  the  time  by  so  doing.  While 
there  is  a  grain  of  sense  in  this,  there  is  another  side  to 
the  subject.  Taxation  when  not  excessive  stimulates  pro- 
duction rather  than  represses  it.  There  is  a  happy  mean 
to  be  maintained  in  all  transactions.  Productive  enter- 
prise will  be  enhanced  and  capacity  for  economic  produc- 
tion will  be  made  greater,  and  by  the  use  of  moderate  taxa- 
tion one  will  redouble  his  energies.  Then,  there  is  a 
question  of  citizenship.  I  believe  that  a  person  who  is 
not  frugal  enough,  industrious  enough,  and  manly  enough, 
to  earn  two  or  three  dollars  a  year  to  pay  for  the  privilege 
of  citizenship,  has  no  right  to  be  a  citizen.  If  taxation 
without  representation  is  tyranny,  taxation  is  also  a  badge 
of  liberty,  which  every  man  should  bear  in  some  form  or 
other.  It  is  true,  you  say,  he  does  bear  that  in  the  taxa- 
tion on  commodities.  To  a  certain  extent  that  is  true. 
^Nevertheless,  I  believe  it  is  a  good  thing  if  he  be  sum- 
moned by  the  proper  authorities  to  "appear  with  a  shovel," 
that  he  may  understand  that  there  is  a  government  over 
him  whose  interests  he  is  bound  to  respect. 

Income  Tax. — The  income  tax  is,  theoretically,  the  most 
nearly  correct  tax  that  we  have,  but  yet  the  most  difficult  to 
collect.  It  falls  upon  the  net  income  of  individuals,  and 
therefore  fulfills  the  canon  which  requires  the  tax  to  vary 
according  to  the  revenues  which  people  enjoy.     If  a  man 


478  ECONOMICS. 

has  no  income,  then  he  will  have  no  tax ;  if  his  income  be- 
comes greater,  his  taxes  become  greater  accordingly;  if 
his  income  declines,  his  taxes  decline  also.  The  difficulty 
has  been  that  in  practice,  the  tax  does  not  vary  so  much 
with  the  rise  and  fall  of  income,  as  with  the  ability  and 
inclination  of  the  payer  to  evade  the  tax.  Our  experience 
with  the  Federal  Income  Tax,  from  1861  to  1872,  a  period 
of  ten  years  in  actual  operation,  was  very  unpleasant.  It 
came  upon  us  suddenly,  as  an  episode  and  as  a  war  meas- 
ure, and  was  to  be  only  provisional.  During  its  whole  ex- 
istence the  laws  were  modified  each  year  by  Congress  trying 
to  readjust  matters  so  that  the  tax  might  fall  with  equal 
justness  upon  all  and  without  complaint.  The  income  tax 
failed  because  it  did  not  have  a  fair  trial ;  because  it  was 
poorly  managed  from  the  beginning;  because  there  were 
those  who  disliked  it  on  acount  of  its  being  too  just  for 
them;  and  finally,  on  account  of  the  unwillingness  of 
persons  to  give  proper  returns. 

The  income  tax  has  been  tried  in  a  mild  way  in  Penn- 
sylvania and  in  other  states,  but  it  has  never  gained  a 
great  success  in  America.  However,  we  know  that  it  has 
been  successfully  tried  in  Prussia,  in  Switzerland,  and  in 
England.  In  England  it  is  a  part  of  the  general  system 
of  taxation.  It  was  introduced  in  1798  by  William  Pitt 
as  a  war  measure,  and  intended  to  remain  only  during  a 
short  time.  It  gradually  grew  into  the  English  system,  and 
though  the  same  complaints  of  un justness  are  urged  against 
the  tax  as  ever,  it  is  still  retained  as  a  part  of  the  system, 
and  probably  will  be  on  account  of  its  general  easy  man- 
agement. The  English  income  tax  is  based  upon  what  is 
known  as  the  sliding  scale. 


ECONOMICS.  479 

A  few  years  ago  a  new  income  and  property  tax  was 
established  in  Switzerland,  in  the  canton  Vaud.  Since 
then  it  has  been  developed  in  other  cantons  of  Switzer- 
land. All  real  property  is  divided  into  three  grades.  For 
all  estates  whose  capital,  maximum  value,  is  $3,000,  the 
rate  of  taxation  is  one  per  cent,  per  thousand;  maximum 
capital  $20,000,  rate  1^  per  cent,  per  thousand;  on  all 
capitals  exceeding  $20,000,  the  rate  is  2  per  cent.  Per- 
sonal property  also  is  divided  into  seven  grades,  and  as- 
sessed at  1,  1^,  2,  2|,  3,  3J  and  per  cent,  per  thousand 
for  respective  grades.  Incomes  are  divided  into  seven 
classes,  and  $80  is  subtracted  from  the  income  for  every 
dependent  upon  that  income  before  the  tax  is  levied. 
Thus,  a  man  who  has  ten  children  and  $1,000  income 
would  have  to  pay  a  tax  of  fifty  cents,  while  a  bachelor 
with  the  same  income  would  have  to  pay  a  tax  of  $15.  And 
one  wonders  in  this  case  how  much  the  government  would 
owe  the  man  with  fourteen  children !  Possibly  he  should 
draw  a  pension  from  the  government  for  at  least  three  of 
them.  Whatever  we  might  say  of  France  and  America, 
doubtless  this  is  an  encouragement  which  Switzerland  does 
not  need,  i.  e.,  that  of  large  families. 

The  general  arguments  used  against  the  income  tax 
formerly  in  force  in  this  country  are  as  follows: 

First,  it  was  claimed  to  be  unconstitutional; 

Second,  it  required  government  inspection  of  private 
interests ; 

Third,  as  improper  returns  were  given,  it  led  to  dis- 
honesty and  to  an  unjustness  of  taxation ; 

Fourth,  it  discriminated  between  persons  having  large 
and  those  having  small  incomes. 


480  ECONOMICS. 

Fifth,  it  was  an  odious  tax,  hated  by  the  people ; 

Sixth,  it  was  an  expensive  tax. 

There  is  not  sufficient  space  to  discuss  all  of  these  va- 
rious objections.  It  is  pertinent  to  say  that  the  party 
which  objected  so  strongly  to  the  income  tax  during  the 
war,  subsequently  undertook  to  place  it  in  practice  again. 
Its  constitutionality  has  been  twice  decided;  once  in  its 
favor,  and  more  recently  against  it.  That  it  was  obnoxious 
and  evaded,  no  one  can  deny ;  but  that  it  did  not  have  a  fair 
trial  and  was  not  properly  managed,  is  easy  to  affirm  and 
prove.  Doubtless,  it  was  one  of  the  least  injurious  taxes 
levied  during  the  war,  and  with  the  exception  of  the  tax  on 
national  banks  it  was  the  cheapest  tax  levied.  The  dis- 
crimination of  this  tax  was  not  greater  than  is  now  found 
in  the  personal-property  tax  of  to-day,  and  a  careful  exam- 
ination into  our  own  real-property  tax  will  show  us  that 
the  latter  has  many  evils  attributed  to  the  income  tax. 
Yet  the  experiment  in  the  time  of  a  great  war,  when  all 
is  confusion,  is  not  a  sufficient  test  of  the  effectiveness  of 
any  method  of  taxation.  However,  it  appears  to  me  that 
if  we  return  to  the  income  tax,  it  should  be  a  part  of  a 
great  system  of  taxation,  and  should  be  a  state  rather  than 
a  federal  tax,  and  that  it  should  entei'  permanently  into 
our  system  in  harmony  with  other  taxes;  not  to  be  used 
as  a  temporary  affair  for  the  raising  of  funds  for  a  few 
years. 

Real-Property  Tax. — The  real-property  tax  is  one  of  the 
oldest  known  taxes.  Taxes  upon  real  property,  or  im- 
movable property  as  it  is  called  in  Europe,  means  taxes  on 
lands,  houses,  mills,  factories,  etc. 

There  is  one  great  advantage  of  the  real  tax,  that  the 


ECONOMICS.  481 

property  upon  which  it  is  assessed  is  always  displayed; 
it  can  be  found  and  recounted; — and  this  has  led  us  to 
think  that  it  is  more  nearly  just  than  any  other.  But  a 
careful  study  of  the  property  tax  in  America  leads  us  to 
discover  many  errors  and  unjust  discriminations.  Com- 
pare the  estimation  of  property  and  taxes  levied  in  any 
county  with  other  counties  of  the  state,  and  also  with  other 
states  from  the  Atlantic  to  the  Pacific,  and  such  a  variety 
of  assessments  and  rates  is  indeed  astonishing.  I  have 
heard  of  cases,  too,  of  actual  fraud,  where  a  certain  man 
of  a  good  deal  of  power  and  influence  has  his  taxes  set 
at  a  certain  rate.  A  new  assessor  being  elected,  desiring 
to  make  all  things  equal,  raises  the  assessment  a  little.  The 
result  is,  the  wealthy  man  goes  before  the  board  of  equali- 
zation and  has  it  reduced  to  what  he  terms  its  proper 
proportion.  A  few  examples  of  this  kind  serve  to  rele- 
gate such  assessor  to  the  background  in  politics. 

Personal-Property  Tax. — The  personal-property  tax, 
which  has  been  so  long  in  vogue,  is  doubtless  as  difficult 
to  assess  as  is  the  income  tax.  It  is  difficult  to-day  for 
the  assessor  or  for  the  person  who  makes  the  returns  to 
give  a  just  estimate  as  to  the  proper  assessment.  The 
number  of  irregularities  in  this  tax  is  greater  to-day  than 
in  any  other  tax  that  we  have.  It  is  certainly  the  worst 
tax  that  we  have.  But  we  ask,  why  is  it  not  abolished  ? 
For  the  reason  that  it  is  supposed  to  reach  a  certain  class 
of  property  which  cannot  be  reached  in  any  other  way, 
and  if  all  taxation  were  taken  from  personal  property 
there  would  be  a  tendency  to  turn,  either  permanently  or 
temporarily,  a  large  class  of  property  into  the  form  of 
what  is  known  as  personal  property.     There  have  been 


482 


ECONOMICS. 


some  attempts  to  reform  the  present  personal-property 
tax  by  taxing  mortgages  and  other  forms  of  security,  but 
as  a  rule  they  have  only  made  bad  matters  worse. 

From  1871  to  1884  there  was  a  shrinkage  of  assess- 
ment of  personal  property  in  the  city  of  New  York  of 
$107,184,371 ;  yet  everybody  knows  that  the  amount  of 
real  property  increased  very  rapidly  during  that  period, 
and  everybody  knows  that  the  amount  of  personal  prop- 
erty has  kept  pace  with  the  increase  of  real  property. 
It  is  said,  also,  that  in  the  city  of  Philadelphia  there 
are  fewer  watches  possessed  by  the  private  citizens  each 
succeeding  year.  It  is  true  that  the  faithful  assessment 
and  collection  of  the  personal  tax  varies  greatly  in  different 
states,  and  in  different  towns,  which  shows  that  there  is 
a  possibility  of  improving  bad  taxation.  Either  this  tax 
ought  to  be  reformed  through  a  better  political  conscience 
or  a  better  system  of  public  administration,  or  it  ought 
to  be  done  away  with  entirely. 

Franchise  Tax. — The  franchise  tax  is  rapidly  coming 
into  vogue  in  Europe  and  in  many  of  the  eastern  states 
and  cities.  It  seems  to  be  one  of  the  best  taxes  that  we 
have  for  reaching  corporations ;  and  by  that  I  do  not  mean 
that  the  corporations  should  pay  more  than  their  propor- 
tionate amount  of  taxes,  either  in  this  or  in  any  other 
form.  It  is  becoming  customary  to  grant  franchises  on 
the  agreement  of  the  company  to  pay  a  certain  per  cent, 
of  the  gross  receipts  into  the  public  treasury.  These  fran- 
chises are  let  for  a  term  of  years  to  the  highest  bidder. 
The  method  has  certainly  worked  well. 

Inheritance  Tax. — Anpther  form  of  taxation  is  the  in- 
heritance tax,  a  tax  much  considered  in  these  days.     The 


ECONOMICS. 


483 


Maryland  law  taxes  collateral  inheritances  over  $500  at 
a  rate  of  2|  per  cent.  Xew  York  and  Pennsylvania  have 
voted  a  5-per-cent.  tax  on  collateral  inheritances.  But 
^ew  York  has  adopted  a  direct  inheritance  tax  of  1  per 
cent,  and  it  is  said  that  the  estate  of  the  late  Jay  Gould 
yielded  a  return  of  about  $700,000.  There  are  some  fea- 
tures in  connection  with  the  use  of  the  inheritance  tax 
that  would  make  it  necessary  to  use  it  with  great  discrim- 
ination. However,  there  seems  to  be  no  real  general  op- 
position to  it  as  a  theoretically  good  tax.  There  would 
need  to  be  careful  discrimination  in  the  case  where  a  man, 
his  wife  and  sons,  had  earned  the  farm  by  working  to- 
gether cooperatively;  and  when  he  passed  away  it  would 
certainly  be  injustice  to  tax  the  farm  before  it  could  pass 
into  their  hands.  A  great  many  other  points  might  be 
cited  in  the  application  of  this  tax  where  it  might  lead 
to  injustice.  There  is  no  reason,  however,  why  a  large 
estate  should,  without  taxation,  descend  to  a  person  when 
not  willed  to  him. 

Indirect  Taxes. — The  indirect  taxes  are  usually  those 
levied  upon  commodities.  They  may  be  either  internal 
revenue,  or  export  or  import  duties.  Indirect  taxes  are 
those  supposed  to  be  shifted  to  the  consumers  by  the  per- 
son who  pays  them.  Theoretically  they  are  considered 
to  violate  the  principle  of  equal  taxation;  to  obstruct 
trade ;  to  foster  monopoly ;  and  are  congenial  to  despotism 
and  aristocracy.  This  is  generally  said  of  all  indirect 
taxes.  But  the  difficult  question  is,  whether  a  direct  tax 
or  an  indirect  tax  is  wanted;  or  which  will  best  sub- 
serve the  purpose  intended.  Without  doubt,  the  best  sys- 
tem of  taxation  is  a  combination  of  the  direct  and  indirect 


484  ECONOMICS. 

taxes.  It  is  easy  to  criticize  either  group  under  present 
circumstances. 

The  most  prominent  indirect  tax  of  to-daj  is  the  so- 
called  protective  tariff, — a  tax  of  a  peculiar  nature 
which  performs,  at  least  in  its  full  intent  and  purpose, 
a  double  function,  that  of  raising  revenue  and  protecting 
home  industry.  This  tax  has  been  before  the  people  for 
nearly  a  hundred  years ;  it  has  been  the  greatest  political 
war-cry  ever  in  existence.  It  has  been  magnified  clear  be- 
yond its  just  proportions  in  its  power  to  improve  or  retard 
our  industrial  conditions.  It  is  a  question  of  great  im- 
portance among  a  score  of  other  important  questions  to  be 
decided  by  our  commonwealth. 

There  is  not  space  to  enter  into  arguments  for  or  against 
the  tax  on  commodities,  for  protection  or  for  free  trade. 
We  are  doubtless  all  familiar  with  its  oft-quoted  argu- 
ments. The  tariff  controversy  and  tariff  history  are  in 
themselves  a  solid  year's  study.  Attention  is  called  to 
a  few  principles  which  may  have  been  overlooked  in  this 
great  tariff  discussion. 

The  first  principle  is,  that  we  cannot  tell  what  is  best 
for  our  nation  by  following  the  examples  of  others.  In- 
deed, we  find  England  prospering  under  free  trade; 
France  and  Germany  prospering  under  protection;  and 
the  United  States  has  prospered  under  protection.  It 
stands  to  reason  that  we  should  have  prospered  whether 
we  had  had  free  trade  or  protection,  and  that  we  shall  pros- 
per, whatever  system  we  adopt.  It  is  also  evident,  at 
least,  that  it  is  not  a  matter  so  much  whether  we  have 
high  protection  or  low  protection,  or  free  trade,  as 
that  we  know  twenty  or  thirty  years  ahead  what  our  sys- 


ECONOMICS.  485 

tern  is  that  we  have  adopted,  and  can  be  sure  that  there 
will  be  no  sudden  changes  or  tinkering  with  this  great 
system.  For,  whether  the  tariff  has  been  a  detriment  to 
the  United  States  or  not,  we  know  that  various  changes 
have  been  wrought  through  the  crooked  journey  over  which 
our  financial  life  has  come,  which  have  been  detrimental 
to  the  progress  of  the  American  people.  A  nation  may 
need  a  tariff  or  it  may  not,  just  as  a  man  may  need  an 
overcoat  or  he  may  not.  In  all  probability  he  does  not  need 
an  overcoat  when  the  sun  is  burning  down  upon  him  and 
the  thermometer  records  ninety  degrees  in  the  shade. 

It  is  sometimes  held  that  the  protective  tariff  improves 
the  wages  of  the  American  laborer.  Doubtless  it  has  an 
indirect  influence  upon  the  laborer,  but,  it  is  to  be  feared, 
not  just  in  the  way  in  which  it  is  sometimes  claimed.  In 
the  past  few  years  it  will  have  been  observed  by  those  who 
have  watched  the  rise  and  fall  of  wages,  that  this  is  to  be 
attributed  to  more  potent  influences  than  that  of  the  protec- 
tive tariff.  The  tariff  has  been  entirely  overestimated  in 
its  power  to  advance  or  retard  prosperity.  It  is  not 
a  correct  inference  that  because  you  raise  the  tariff 
on  all  kinds  of  iron  products  there  will  be  a  rise  in 
the  wages  of  the  iron-workers.  Indeed,  as  a  rule,  it  has 
not  proved  true.  Suppose  there  is  a  rise  in  the  tariff  on 
woolen  goods:  are  the  wages  of  the  workers  in  wool  in- 
creased ?  Undoubtedly  it  is  only  through  a  general  system 
of  protective  tariff,  provided  a  nation  is  in  a  position  to 
need  one,  that  industries  may  be  stimulated,  that  a  greater 
demand  for  labor  may  be  created,  or  that  a  standard  of 

living  may  be  kept  up  which  will  have  a  tendency  to  en- 
—30 


486  ECONOMICS. 

large  the  opportunity  of  the  wage-earner  to  earn  greater 
wages  and  will  give  him  more  ability  to  earn  them.  But 
this  is  only  in  a  very  general  way,  on  the  basis  of  a 
nation  developing  a  variety  of  industries  and  its  wealth 
of  natural  resources. 

Again,  it  is  claimed  that  if  an  article  bears  a  certain 
price  without  protection,  its  wholesale  price  will  be  equal 
to  the  first  cost  plus  the  protective  duty.  This  is  not  al- 
ways true.  There  will  be  a  tendency  for  the  manufactured 
domestic  product  to  rise  to  the  equilibrium  of  the  imported 
product  plus  the  duty  on  it;  but  this  point  will  seldom 
be  reached,  on  account  of  the  competition  induced  by 
stimulated  industries.  And  it  must  be  admitted  that  a 
protective  tariff  does  stimulate  industries.  This  is  histor- 
ically correct;  but  the  question  is  whether  it  stimulates 
industries  at  the  expense  of  something  else  or  not,  or 
whether  in  the  long  run  we  shall  not  be  better  off  not  to 
have  the  industry  stimulated  for  a  short  time,  only  to  pass 
into  a  period  of  depression  of  the  whole  country. 

The  prune  industry  of  California  is  a  good  example. 
Prunes  are  destined  to  be  one  of  the  great  fruit-foods  of 
America.  Suppose  dealers  can  ship  prunes  into  New  York 
and  sell  them  in  the  market  three-fourths  of  a  cent  cheaper 
than  can  the  fruit-growers  of  California.  The  question 
is,  shall  we  put  a  tariff  on  prunes  of  three-fourths  of  one 
per  cent.,  to  allow  California  to  have  a  fair  competition 
in  the  market  of  our  nation  with  that  of  Spain  ?  Can  the 
prune-eaters  of  America  afford  that  for  the  sake  of  devel- 
oping a  great  natural  resource  of  America?  I  think  they 
can.  Under  such  circumstances,  a  high  tariff  of  three  or 
four  cents  a  pound  might  be  quite  a  monopoly  to  a  few 


ECONOMICS.  487 

individuals  at  the  expense  of  a  great  majority  of  the 
people. 

And  so  we  have  a  basis  for  the  establishment  of  pro- 
tection on  equality  of  sacrifice;  each  section  would  be 
benefitted  according  to  the  articles  it  has  to  protect.  But 
that  section  which  has  no  articles  to  protect  either  directly 
or  indirectly  may  not  gain  much  by  the  process.  But  the 
cardinal  objection  is,  if  Cuba  can  raise  sugar  cheaper  than 
we  can,  why  not  let  her  raise  it,  and  we  will  raise  some- 
thing else  in  exchange  for  sugar?  This  is  one  of  the 
most  forcible  objections  to  the  protective  tariff.  And  it 
is  easy  to  see  that  if  a  tariff  becomes  extensive  it  will  work 
a  positive  detriment  by  destroying  our  foreign  trade.  It 
is  not  true,  however,  that  it  would  be  better  for  us  to  raise 
corn  and  cotton  as  England  desires  us  to  do,  and  let  her 
do  the  manufacturing.  That  philosophy  does  not  hold  in 
economy,  for  there  are  other  things  to  be  considered  in 
national  life  and  national  economy  than  this.  (See  Inter- 
national Values.)  But  in  so  far  as  a  protective  tariff  is 
usually  adjusted  so  as  to  improperly  shut  off  foreign  trade, 
it  as  a  rule  works  a  detriment  to  the  nation  that  estab- 
lishes it. 

References :  Adams,  H.  C,  The  Science  of  Finance ;  Ely,  R.  T., 
Taxation  in  American  States  and  Cities;  Seligman,  E.  R.  A.,  Essays 
in  Taxation ;  Ashley,  Percy,  Modern  Tariff  History;  Taussig,  F.  W., 
History  of  the  Tariff. 


488  ECONOMICS. 


CHAPTEK  IV. 

A  KATIONAL  SYSTEM  OF  FINANCE  AND  TAXATION. 

Irregular  Development  of  Finance  and  Taxation. 

The  development  of  industry  has  led  to  many  changes  in 
the  character  of  property.  It  has  brought  about  an  in- 
crease in  the  number  of  forms  in  which  property  exists. 
The  aim  of  taxation  has  been  to  reach  every  new  kind  of 
property  coming  into  existence.  Thus,  in  the  early  period 
of  the  history  of  the  nation,  farming  was  the  chief  occu- 
pation. There  was  a  very  small  amount  of  corporate 
property,  a  comparatively  small  amount  of  what  is  knoAvn 
as  personal  property  in  stocks  and  bonds  and  other  wealth, 
and  likewise  a  comparatively  small  amount  in  mills  and 
factories.  It  was  then  a  very  easy  matter  to  ascertain  the 
amount  of  property  each  person  had,  and  to  assess  it  regu- 
larly. The  property  that  one  had  represented  the  capacity 
to  pay  more  nearly  than  it  does  when  a  variety  of  property 
has  come  into  use. 

In  the  history  of  the  development  of  taxation  the  state 
has  attempted  to  do  justice  to  all  in  levying  a  tax  on  each 
separate  kind  of  property.  It  has  resulted  in  a  great  many 
irregularities  of  taxation.  While  it  has  led  to  double  tax- 
ation in  many  instances,  it  has  also  allowed  certain  kinds 
of  property  to  escape  paying  its  just  proportion  of  taxes 
according  to  capacity.  There  has  not  been  a  systematic 
plan  prepared  for  general  taxation  on  a  basis  of  the  inci- 
dence of  taxes.     When  a  tax  is  once  levied  and  collected 


ECONOMICS. 


489 


on  a  given  property,  it  is  not  easy  to  dispose  of  it  or  to 
change  it  for  a  tax  of  another  kind;  and  the  attempts 
made  have  been  isolated  and  fragmentary  legislation, 
which  has  tended  to  confuse  matters  more  than  would  have 
been  the  case  had  the  subject  been  approached  in  a  more 
rational  manner.  As  you  cannot  touch  one  method  of 
taxation  to  reform  it  without  interfering  with  the  whole 
tax  system,  reforms  in  taxation  should  be  in  charge  of  a 
commission  which  would  systematically  study  the  effect 
of  every  kind  of  tax  in  the  state,  ascertaining  carefully 
who  really  bears  the  burden  of  taxation.  While  every  one 
feels  the  need  of  a  reform  in  taxation,  we  perhaps  shall 
never  reach  rational  improvement  until  we  go  to  work 
systematically  and  reform  the  entire  system. 

Imperfections  of  Modern  Taxation. 

The  imperfections  of  taxation  have  arisen  largely  in  the 
attempts  of  the  government  to  reach  all  forms  of  property, 
on  the  one  hand,  and  the  attempts  of  people  who  possess 
the  property  to  evade  or  to  reduce  taxes  on  the  other. 
The  system  of  rational  taxation  based  upon  capacity  or 
equality  of  sacrifice  has  been  departed  from  to  a  great 
extent.  Many  of  the  principles  of  taxation  have  been 
violated. 

Again,  taxes  have  been  collected  for  the  purpose  of 
carrying  on  public  functions  which  might  well  have  been 
dispensed  with.  Accompanying  the  expansion  of  industry 
has  been  the  expansion  of  government.  While  the  essential 
functions  of  government  have  remained  steady,  demanding 
an  increasing  amount  of  expenditure  instead  of  a  decreas- 
ing, other  and  new  functions  have  been  added  to  the  gov- 


490  ECONOMICS. 

ernment,  which  have  added  to  the  burdens  of  the  people. 
Even  when  it  is  correct  in  theory  and  principle  and  gen- 
eral expediency  to  introduce  new  duties  of  government, 
these  new  duties  often  have  not  yielded  any  adequate  re- 
turn to  the  people  for  a  number  of  years,  and  in  the  attempt 
to  expand  the  service  of  the  government  of  the  people 
many  things  have  been  tried  which  have  been  nothing  but 
a  positive  waste  to  the  community.  Many  difficulties  of 
assessment  have  also  arisen  to  increase  the  evil  conditions 
of  the  case.  Fleeting  forms  of  property  have  led  to  a  pur- 
suit by  the  legislator  and  the  tax-gatherer  which  has  in- 
creased the  imperfections  of  the  system. 

Methods  of  Collecting  Revenues. 
From  the  early  history  of  this  nation  we  have  collected 
the  national  revenue  largely  from  a  tariff  on  imports.  This 
has  nearly  always  been  accompanied  by  a  plea  for  protec- 
tion to  American  industries.  While  it  has  cost  the  people 
an  enormous  amount  in  proportion  to  the  revenue,  it  still 
has  been  quite  satisfactory  to  them  as  a  method  of  raising 
revenue.  The  evil  condition  of  it,  so  far  as  a  system  of 
finance  is  concerned,  is  in  the  fact  that  in  attempting  to 
gain  the  largest  revenue  out  of  it  injustice  may  be  done 
to  certain  classes  of  industries  or  certain  sections  of  the 
country.  On  the  other  hand,  in  attempting  to  protect  cer- 
tain industries  or  sections  of  the  country,  the  revenue  may 
be  small  and  inadequate.  Yet  this  tax  has  grown  historic- 
ally into  the  nation,  and  is  such  a  power  in  the  develop- 
ment of  the  industry  of  the  country  that  it  is  likely  to  be 
retained  in  the  United  States,  although  many  times  it 
may  be  detrimental  to  the  best  interests  of  the  country. 


ECONOMICS.  491 

so  far  as  commerce  and  the  rational  development  of  in- 
dustry are  concerned. 

The  revenues  from  the  sale  of  public  lands,  which  were 
so  important  in  the  early  history  of  the  nation,  have  grad- 
ually declined  into  comparative  insignificance.  Revenues 
from  incomes  were  collected  in  the  war  period  from  1862 
to  1872.  This  tax  was  declared  constitutional  at  one  time, 
but  a  subsequent  law,  passed  by  Congress  August  27,  1894, 
was  declared  unconstitutional  by  decisions  of  the  Supreme 
Court  on  April  8  and  May  20,  1895. 

The  tax  on  home  products,  which  is  also  a  tax  on  con- 
sumption, has  long  been  a  means  of  raising  the  public 
revenue.  The  tax  on  beer,  liquor,  tobacco,  etc.,  seems  to 
have  become  a  means  of  raising  revenue.  There  is  no  real 
reason  why  such  commodities  should  be  singled  out  of  all 
others  and  taxed,  except  it  is  an  easy  way  of  taxation,  and 
also  aims  at  a  luxury  and  an  evil.  It  is  difficult  to  ascer- 
tain the  real  influence  of  such  a  tax  in  suppressing  evil, 
for  it  leads  to  adulteration  of  goods  and  falls  heavily  upon 
consumers,  many  of  whom  are  among  the  poorer  classes 
of  people. 

E'ew  taxes,  such  as  the  franchise  tax,  largely  in  munici- 
palities, and  the  inheritance  tax  in  states,  have  come  grad- 
ually into  use.  The  old  tax  on  property  has  been  a  promi- 
nent factor  in  our  system,  although  abandoned  in  nearly 
every  other  nation  in  the  world.  While  we  have  recog- 
nized the  shifting  of  property  to  other  forms,  we  still 
cling  to  the  old  form  as  a  necessary  means  of  raising  reve- 
nue. So  far  as  land  is  concerned,  no  better  tax  will  ever 
be  found ;  but  the  taxation  of  improvements  and  personal 


492  ECONOMICS. 

property  becomes  more  irregular  every  year  o«£  its  ex- 
istence. 

Double  Taxation. 

The  attempt  to  tax  property  in  a  variety  of  forms  has 
led  to  much  double  taxation.  Thus,  when  a  state  taxes 
the  land  and  the  mortgage  and  the  money  lent  on  the  mort- 
gage, there  is  double  taxation,  and  in  some  instances  triple 
taxation.  The  mortgage  was  a  new  kind  of  property, 
and  it  was  felt  that  the  burden  of  taxes  was  falling  upon 
the  borrower  and  owner  of  the  land,  and  not  upon  the 
lender  of  money.  As  the  person  who  holds  the  mortgage 
generally  shifts  the  tax  upon  the  borrower,  the  latter 
pays  the  tax  on  his  mortgage.  And  then  if  he  takes  the 
money  and  puts  it  in  improvements  or  stock  on  his  farm, 
he  pays  taxes  on  that  again.  The  man  who  has  property 
in  sight  almost  always  does  the  heavy  paying  of  taxes. 
The  attempt  to  tax  the  income  of  a  property  with  an  addi- 
tional tax  on  the  property  itself,  is  another  form  of  double 
taxation.  Also,  if  a  man  is  conducting  business  and  his 
property  is  taxed  and  then  a  tax  is  levied  upon  his  business, 
he  is  taxed  double.  There  can  be  nothing  absolutely  wrong 
in  taxing  the  same  person  for  the  same  thing  in  two  differ- 
ent ways,  but  it  leads  to  injustice  if  it  develops  a  looseness 
of  taxation  which  leads  to  inequality.  When  only  a  part 
of  the  people  are  thus  taxed  and  others  go  free,  injustice 
arises. 

It  is  wrong  not  to  tax  mortgages  when  a  man's  property 
is  nearly  all  vested  in  them.  Yet,  as  it  is  possible  for  him 
to  shift  this  tax  upon  the  mortgagee  by  charging  him  a 
higher  rate  of  interest,  it  is  idle  to  tax  him.  The  prop- 
erty must  be  taxed  in  some  other  way,  namely:    that  of 


ECONOMICS.  493 

income.  A  direct  income  tax,  properly  classified,  cannot 
be  shifted.  The  question  of  debts  in  taxation  is  a  grievous 
one.  A  man  must  be  taxed,  however,  upon  what  he  has,  and 
not  upon  what  he  has  not.  The  rational  way  of  considering 
the  taxation  of  mortgages  is  as  follows:  If  the  assessed 
valuation  of  a  given  farm  is  $4,000  and  there  is  a  mort- 
gage on  this  land  of  $2,000,  it  is  evident  the  property  in 
the  land  represents  the  entire  property  in  question,  on 
the  supposition  that  half  of  the  value  is  covered  by  the 
mortgage.  ISTow  all  of  the  tax  may  be  levied  on  the  land 
and  allow  the  mortgage  to  go  free,  or  all  of  the  tax  on 
the  land  and  allow  the  mortgage  to  be  taxed  in  addition, 
or  allow  half  of  the  tax  to  be  levied  on  the  mortgage  and 
half  on  the  land.  There  is  no  doubt  that  the  latter  method 
is  the  logically  correct  and  just  one,  but  wherever  it  has 
been  tried  it  has  proved  detrimental  to  the  borrowers,  and 
those  who  borrow  have  been  obliged  to  lose  the  amount  of 
the  tax  in  another  way. 

Another  difficulty  arises  in  the  constant  shrinkage  of 
the  value  of  land.  If  the  value  of  the  land  declines  one- 
half  and  the  mortgage  be  assessed  at  its  full  value,  the 
mortgagee  will  be  paying  more  than  his  proper  proportion, 
unless  he  can  shift  it.  The  only  way  would  be  to  assess 
the  land  at  its  full  market  value  and  then  to  insist  that  he 
pay  a  just  proportion ;  or,  as  I  shall  relate  below,  put  the 
mortgage  in  an  entirely  different  category  and  tax  the  land 
on  its  full  valuation. 

Taxation  of  Corporations. 
Double  taxation  is  more  readily  shown  in  the  history  of 
corporation  taxes  than  in  any  other  way.     It  illustrates 


494  ECONOMICS. 

the  attempt  of  a  tax  to  adjust  itself  to  new  kinds  of  prop- 
erty while  still  clinging  to  the  old  systems  of  taxation.  In 
the  early  history  of  the  United  States  the  corporations  were 
so  few  that  when  they  did  come  into  existence  they  were 
not  noticed  as  having  a  special  form  of  property.  Finally^ 
they  were  treated  as  individuals  under  the  general-prop- 
erty tax.  But  as  time  passed  on  it  was  realized  that  in 
the  form  of  improvements,  bonds,  stocks,  fixtures,  etc., 
corporations  had  a  variety  of  property  which  was  not 
reached  by  the  ordinary  property  tax. 

To  meet  these  various  forms  of  property,  commissions 
for  the  taxation  of  transportation  companies  in  certain 
states  have  been  established.  Corporations  have  been 
taxed  by  different  methods  in  different  states,  according 
to  the  principles  of  taxation  prevailing  in  those  different 
states. 

The  taxation  of  property  has  gradually  given  way  to  the 
taxation  of  certain  forms  which  represent  their  tax-paying 
capacity.  Among  these  forms  we  find:  First,  valuable 
property;  second,  franchises.  These  taxes  may  be  esti- 
mated on  cost  of  property,  capital  stock  at  par  value, 
capital  stock  at  market  value,  capital  stock  plus  bonded 
debt  at  market  value,  capital  stock  according  to  dividends, 
capital  stock  plus  total  debt  both  funded  and  floating,  gross 
earnings,  net  earnings,  bonded  debt  or  loans,  business 
transacted,  and  dividends.  These  various  methods  of  at- 
tempting to  reach  taxable  property  of  corporations  have 
caused  confusion  on  account  of  irregularity  within  the 
state,  and  especially  because  various  separate  states  have 
different  methods  of  taxation  which  greatly  interfere  with 


ECONOMICS.  495 

interstate  property  and  non-resident  property-holders.  It 
has  led  to  double  taxation  in  no  less  than  five  different 
ways. 

The  importance  of  taxation  of  corporations  is  then  very 
great.  If  the  principles  of  the  old  property  tax  are  to  be 
maintained,  they  must  be  treated  differently  from  individ- 
uals. If  local  taxation  is  to  prevail,  it  should  rest  upon 
real  estate  only.  A  franchise  tax  of  a  certain  per  cent, 
of  the  gros's  earnings  of  the  corporation  paid  into  the 
public  treasury  should  be  a  constant  factor  in  the  taxation 
of  all  corporations,  for  the  reason  that  they,  having  fre- 
quently special  privileges  granted  them  by  the  people, 
should  thus  make  a  public  recognition  of  the  same.  Over 
and  above  this,  a  tax  on  their  capital  and  loans  might  be 
a  means  of  reaching  all  the  paying  capacity  of  the  corpo- 
ration. If  the  property  is  taxed,  the  capital  stock  should 
go  free,  and  if  a  tax  is  placed  upon  loans,  then  no  tax 
should  be  laid  upon  bond-holders. 

Interstate  agreements  should  be  made  concerning  inter- 
state corporations,  so  that  the  residence  of  the  share-holders 
or  bond-holders  would  be  immaterial,  and  arrangements 
made  so  that  taxation  of  property  in  one  state  would  not 
be  duplicated  in  another.  By  some  process  of  this  kind, 
possibly  there  might  be  a  rational  system  for  the  taxation 
of  corporations;  but  even  that  will  be  found  inadequate. 

Single  Tax. 

To  get  rid  of  the  confusion  of  taxation  with  all  of  its 

irregularity  and  waste,  many  people  have   advocated   a 

single  tax  on  land  values.     This  has  many  advantages :   In 

its  simplicity, — the  land  is  always  in  sight  and  it  can  be 


496  ECONOMICS. 

easily  assessed;  second,  a  tax  on  the  economic  income  of 
land  cannot  be  shifted.  The  taxes  would  be  taken  off  all 
improvements  and  personal  property,  which  would  give 
an  impetus  to  all  industries,  would  develop  the  soil,  and 
would  have  a  tendency  to  bring  into  use  all  vacant  land. 
This  in  the  long  run  would  increase  the  value  of  all  other 
business. 

But  the  defects  of  the  system  are  evident  in  the  fact  that 
no  single  tax  on  any  form  of  property  is  sufficient  to 
meet  the  variety  of  forms  of  property  existing  in  modern 
times.  Hence  this  tax  cannot  be  advocated  as  a  cure-all 
for  all  the  evils  of  taxation. 

The  irregularities  of  the  property  tax,  as  seen  in  the 
assessment  of  real  estate  and  also  in  the  returns  of  personal 
property,  insist  that  there  must  be  a  change  in  the  former 
and  an  abolition  of  the  latter.  It  is  one  of  the  discouraging 
features  of  our  progress,  that  as  soon  as  a  man  puts  forth 
extra  energy,  endures  special  sacrifices  to  put  in  a  form 
of  machinery,  to  build  a  house  for  the  protection  of  his 
home  and  family,  adds  stock  to  his  farm,  or  new  machinery 
for  its  better  tillage,  the  assessor  immediately  appears 
upon  the  scene  and  rewards  him  for  his  improvement  of 
the  country  by  laying  an  extra  burden  of  taxes  upon  him. 
Every  one  knows  that  the  improved  home,  the  improved 
machinery,  and  the  large  amount  of  stock  on  the  farm, 
will  not  only  bring  benefits  to  the  person  who  establishes 
it,  but  will  lead  to  a  largely  increased  social  benefit.  In 
coming  to  the  point  of  a  rational  system  of  taxation,  we 
must  insist — first,  that  it  shall  be  simple;  second,  that 
it  shall  be  so  arranged  as  to  reach  the  entire  tax-paying 
capacity  of  the  individuals  of  the  community. 


ECONOMICS. 


m 


Land  and  Income  Tax. 

Perhaps  the  simplest  method  of  reaching  the  taxing 
capacity  of  a  community  is  in  a  combination  of  the  land 
and  income  taxes, — the  assessment  of  land  at  its  full  valua- 
tion on  what  is  determined  by  its  economic  rent,  or  as  is 
commonly  known,  a  tax  on  land  values.  It  is  simply  an 
estimation  of  the  value  of  land  shown  by  the  income  over 
and  above  the  cost  of  production.  Let  this  assessment  be 
carefully  made.  Exempt  all  personal  property  and  goods 
from  taxation,  and  then  place  a  tax  on  incomes  from  what- 
soever source,  except  that  of  land,  and  all  forms  of  prop- 
erty will  be  reached.  In  the  taxation  of  incomes  a  careful 
classification  of  the  income,  from  whatever  source,  should 
be  made,  and  the  tax  should  be  graded  so  as  to  meet  all 
forms  of  income  according  to  sources.  Thus,  a  classifica- 
tion of  salaries,  of  incomes  from  manufacturing,  merchan- 
dising, stocks  and  bonds,  etc.,  should  be  made. 

As  before  noticed,  we  have  in  combination  two  forms 
of  taxation, — one  the  easiest  to  assess  and  collect,  and  the 
other  the  most  difficult.  But  when  reduced  to  a  system, 
the  income  tax  could  be  more  readily  collected  than  the 
present  general-property  tax,  excepting  the  tax  on  land. 
The  great  difficulty  with  the  income  tax  as  levied  in  the 
United  States  is,  that  it  has  been  in  addition  to  other 
forms  of  taxation,  which  has  led  to  a  seeming  injustice. 
This  form  of  land  and  income  taxation  has  been  success- 
fully used  in  New  Zealand,  and  in  the  first  year  of  its 
trial  the  same  amount  of  revenue  was  raised  as  had  for- 
merly been  raised  with  the  various  methods  employed,  and 
with  greater  justice  than  previously. 


498  ECONOMICS. 

Inequitable  Assessment. 

With  this  method  we  should  lose  all  of  the  inequality 
of  assessment  which  now  pertains  to  the  personal-property 
tax.  We  also  should  be  obliged  to  enforce  an  equity  of  as- 
sessment of  real  estate  which  does  not  now  exist.  Though 
land  is  in  sight,  there  exists  the  greatest  inequality  of 
assessment  and  taxation. 

The  first  principle  of  reform  should  be  to  insist  that 
land  should  be  taxed  at  its  full  market  value,  or  with  a  ref- 
erence to  the  economic  rent  of  such  properties  and  with 
the  elimination  of  the  element  of  improvements,  and  thus 
assessment  could  be  more  readily  determined  than  is  usu- 
ally supposed.  As  soon  as  we  depart  from  the  actual 
value  of  property  as  a  basis  of  taxation,  we  begin  to  de- 
velop irregularity  and  injustice  in  assessment. 

Thus,  for  example,  in  the  assessment  in  Kansas  in  1896, 
in  Cowley  county,  real  estate  was  assessed  at  25  per  cent, 
of  its  real  market  value ;  in  Johnson  county,  40  to  60  per 
cent. ;  in  McPherson  county,  40  per  cent. ;  in  Eeno 
county,  from  25  to  33  1-3  per  cent.  In  Ottawa  county, 
land  was  placed  at  from  one  dollar  to  one  dollar  and 
twenty-five  cents  per  acre,  and  other  property  at  one-fourth 
value.  In  Dickinson  county,  real  estate  was  assessed  at 
26  per  cent,  of  its  actual  value;  in  Saline  county,  land 
was  33  1-3  per  cent,  of  its  actual  value.  But  this  irregu- 
larity was  found  more  noticeable  on  property  not  in  land. 
Thus,  in  Dickinson  county  corn  was  assessed  at  18  cents 
per  bushel,  in  Geary  6  cents,  in  Morris  6  cents,  in  Ottawa 
8  cents,  in  Wilson  16  cents,  in  Reno,  4  cents,  and  in  John- 
son 10  cents.  Wheat  was  assessed  at  46  cents  per  bushel 
in  Wilson  county,  16  cents  in  Osborne,  10  cents  in  Ottawa, 


ECONOMICS.  499 

50  cents  in  Dickinson,  60  cents  in  Sumner,  40  cents  in 
Marshall,  and  20  cents  in  Douglas.  Thus  there  was  a 
variation  in  the  value  of  corn  of  from  4  to  24  cents  per 
bushel,  in  wheat  from  10  to  60  cents;  also  a  variation  in 
the  value  of  the  cows  from  $7  to  $25  in  different  counties. 
This  variation  was  not  regulated  according  to  distance 
from  the  market  and  cost  of  transportation.  Each  county 
board  of  assessors  had  a  different  estimate  on  values  and 
a  different  method  of  scheduling  property.  These  irregu- 
larities exist  in  nearly  every  state  in  the  Union,  and  before 
a  rational  system  of  taxation  can  be  put  in  practice  a 
uniform  and  equitable  plan  must  be  adopted  and  carried 
out. 

Methods  of  Collection. 

One  of  the  prime  methods  of  economy  in  a  financial 
system  is  to  have  taxes  regularly  collected.  Although  not 
so  difficult  as  the  assessment,  it  is  essential  that  the  collec- 
tion of  taxes  should  conform  to  business  methods.  In  the 
case  of  the  income  tax,  should  it  ever  be  instituted  as  a 
state  institution,  its  collection  should  be  arranged  so  as 
to  cause  no  extra  expense.  Taxes  should  be  paid  directly 
into  the  hands  of  the  county  treasurer  for  all  purposes,  and 
this  treasurer  should  be  custodian  of  all  funds,  state, 
county,  district  or  township,  except  certain  funds  col- 
lected on  account  of  the  state,  which  should  be  paid  over 
into  the  state  treasury. 

One  of  the  defects  of  the  tariff  is,  that  it  is  difficult  to 
collect  the  tax.  Our  custom-houses  have  been  among  the 
most  difficult  agencies  to  maintain  in  the  United  States. 
Nor  is  that  all.  When  the  tax  has  been  properly  collected 
at  a  great  expense,  the  consumer  must  pay  it  at  an  in- 


600  ECONOMICS. 

creased  expenditure.  This  makes  it  difficult  to  insure 
justice.  The  old  system  of  collecting  taxes  by  sending 
to  the  individual  an  agent  who  received  a  commission  for 
his  services,  has  been  largely  dispensed  with. 

Public  Expenditures. 

Usually  the  expenditures  from  the  public  treasury  are 
classified  into  those  that  go  to  the  support  of  the  govern- 
ment and  those  paid  directly  to  individuals.  By  the  sup- 
port of  the  government  is  meant  not  only  the  payments  for 
the  running  of  the  government  machinery,  such  as  the  sal- 
aries of  certain  officers  and  the  expenses  of  their  offices, 
but  also  those  funds  that  are  paid  out  for  the  general 
welfare  of  the  community,  irrespective  of  any  persons  or 
classes  of  people.  The  other  group  of  expenditures  is  rep- 
resented in  such  as  is  dispensed  for  charity,  pensions,  and 
individual  benefits.  This  classification,  however,  is  not 
wise,  if  we  wish  to  grasp  the  full  meaning  of  government. 

We  find  that  there  are  certain  functions  of  the  state 
essential  to  its  maintenance.  Among  these  are  the  keeping 
of  order  and  the  protection  of  property  and  persons;  all 
regulations  concerning  the  possession,  transmission,  and 
exchange  of  property;  the  definition  and  punishment  of 
crime ;  the  establishment  of  contract  rights ;  the  adminis- 
tration of  justice;  the  definition  of  political  duties  and 
privileges;  the  determination  of  the  relations  of  citizens; 
the  maintenance  of  the  autonomy  of  the  state  in  dealing 
with  foreign  powers.  Without  these  functions  a  state  can- 
not be  said  to  exist,  for  it  is  in  the  administration  of  these 
that  a  people  is  entitled  to  the  right  to  be  called  a  state. 
The  minimum  of  expenditures  for  a  state  or  government 


ECONOMICS.  501 

must  be  in  providing  for  and  carrying  out  these  principles 
of  government. 

Starting  from  this  point,  a  government  may  add  any- 
thing which  the  majority  determines  shall  be  for  the  gen- 
eral welfare.  There  is  no  limit  to  the  powers  of  a  state 
controlled  by  the  law  of  the  people,  except  what  the  ma- 
jority cannot  do, — that  is,  the  impossible  in  government. 
Among  optional  duties  and  services  of  government  may 
be  named  the  following :  Education ;  care  of  the  poor  and 
incapable ;  regulation  of  labor ;  maintenance  of  systems  of 
transportation  and  communication,  such  as  railroads  and 
postal  and  telegraph  systems;  the  manufacture  and  distri- 
bution of  public  utilities,  such  as  water,  gas,  etc. ;  the 
regulation  of  industries  and  trade;  improvement  of  san- 
itation; cultivation  of  forests  and  land;  care  of  fish  in 
rivers;  and  finally,  the  regulation  of  the  consumption  of 
food  and  drink.  As  there  is  practically  no  limit  to  what 
a  state  may  vote  to  do  for  the  people,  there  can  be  no 
limit  to  their  expenditures ;  therefore  it  is  wisely  provided 
that  all  expenditures  shall  be  determined  by  the  repre- 
sentatives of  the  people. 

Sometimes  charities  have  been  classified  as  personal  ex- 
penditures. It  is  true  that  the  expenditures  apply  to  cer- 
tain persons,  but  it  is  for  the  benefit  of  the  public.  Edu- 
cation applies  to  certain  persons,  but  it  is  for  the  benefit 
of  the  public  at  large.  While  we  establish  practically  free 
education,  the  limitations  of  individuals  are  such  that 
many  are  deprived  of  exercising  the  privilege.  While  we 
vote  funds  to  help  the  poor,  insane,  and  blind,  it  is  merely 
as  a  public  function  and  not  as  a  charity.  The  state  is 
—31 


502 


ECONOMICS. 


merely  seeking  to  preserve  itself  in  the  care  of  these  indi- 
viduals. The  same  may  be  said  with  regard  to  the  ex- 
penditures for  penal  institutions.  While  we  may  attempt 
to  reform  criminals,  it  is  not  so  much  for  the  benefit  of 
the  individuals  as  for  the  state  at  large.  As  far  as  the 
state  itself  is  concerned,  it  has  no  right  to  expend  any- 
thing for  individuals.  Its  final  aim  must  be  its  own  pres- 
ervation and  the  welfare  of  the  public  at  large. 

The  expenditures  for  pensions  cannot  be  considered  a 
charity.  That  is,  were  there  nothing  else  involved  in  it 
than  the  bare  help  of  individuals,  the  state  would  have  no 
right  to  grant  pensions.  But  it  is  as  a  method  of  paying 
those  who  will  risk  their  lives  for  a  state,  that  pen- 
sions are  granted.  While  they  appear  to  be  given  to  a 
certain  class,  it  is  done  for  the  purpose  of  future  defense 
and  welfare.  Soldiers  who  take  their  lives  in  their  hands 
to  fight  the  battles  of  their  country  receive  purposely  a 
very  small  pay,  inadequate  for  the  time  of  service.  Hence 
it  is  that  the  pension  is  nothing  more  than  a  supplementary 
pay  to  those  who  sacrifice  most  in  the  service.  Therefore, 
when  wisely  administered,  the  pension  system  is  valuable 
for  the  preservation  of  government  and  the  perpetuation  of 
liberty.  The  amount  is  only  limited  by  the  judicial  ex- 
penditure for  the  welfare  of  the  community. 

The  chief  thing  to  be  observed  in  government  expendi- 
ture is  economy.  A  thousand  things  might  be  presented 
which  in  theory  might  be  a  benefit  to  the  people,  but  the 
good  returning  from  the  expenditure  would  not  be  equiva- 
lent to  the  money  expended  with  interest  on  the  same, — 
and  this  should  be  the  basis  of  all  expenditure.     Legis- 


ECONOMICS.  603 

lators  and  officers  seldom  realize  that  the  money  taken 
from  the  pockets  of  the  people  to  be  expended  by  the  gov- 
ernment should  yield  a  return  equivalent  to  the  amount 
collected  plus  the  interest  on  the  same  at  an  ordinary  rate 
of  interest.  The  calculation,  then,  of  the  social,  commer- 
cial and  moral  good  to  a  community — in  other  words,  the 
calculation  of  the  amount  of  well-being  to  be  gained  by  any 
expenditure — must  be  made  by  all  officers.  Well-inten- 
tioned people  see  things  that  would  be  an  improvement 
to  the  community,  and  therefore  advocate  the  appropria- 
tion of  funds  for  this  service,  when  in  reality  the  good 
derived  will  in  no  way  be  equivalent  to  the  amount  of  the 
expenditure.  Here  as  elsewhere,  good  business  consists 
in  keeping  down  unnecessary  and  unwise  expenses.  In 
ordinary  business,  many  people  fail  because  of  spend- 
ing their  entire  energy  to  the  increase  of  income.  A  large 
proportion  of  it  ought  to  be  spent  in  keeping  down  ex- 
penses. It  will  be  found  that  the  prime  principle  of  busi- 
ness success  consists  in  the  economy  of  the  wealth  at  com- 
mand, and  these  principles  should  extend  to  all  public 
expenditures. 

The  Budget. 

Economy  then  is  very  essential  in  making  up  the  budget 
of  expenditures  for  every  county,  state,  or  government. 
1^0  doubt  if  everything  was  included  in  the  items  of  ex- 
penditure that  are  proposed  every  year  by  some  legislators 
in  the  United  States,  our  expenditures  would  be  increased 
a  hundred  fold,  sufficient  to  bankrupt  the  state  in  a  year 
or  two.  And  nearly  every  one  of  these  propositions  for 
the  expenditure  of  money  would  be  of  more  or  less  benefit 
to  the  community.     But  the  principle  would  be  violated 


504 


ECOITOMICS. 


that  tlie  return  for  the  expenditure  should  be  equivalent  to 
the  expenditure  plus  the  interest.  In  making  up  the 
budget  of  the  various  states  and  of  the  nation,  many  things 
are  included  which  cannot  be  included  in  the  category  of 
wise  expenditure.  Hence  it  is  that  in  making  up  the 
budget  of  expenditures,  especial  care  should  be  taken  to 
include  in  it  only  those  expenditures  which  shall  be  pro- 
ductive of  general  good  to  the  people.  In  private  business, 
people  limit  their  expenditures  by  the  supposed  amount  on 
hand.  In  public  expenditures,  they  estimate  the  needs  of 
legitimate  government  and  levy  accordingly  upon  the  peo- 
ple for  payment.  The  principle  of  public  expenditure, 
then,  must  be  guarded  with  more  care  and  wisdom  than 
that  of  private  business. 

Public  Debts. 

That  expenditures  shall  not  become  a  burden  to  the 
people,  it  has  become  customary  to  borrow  money  and  ex- 
tend payment  over  a  series  of  years.  It  is  done  on  the 
principle  that  certain  improvements  cannot  be  carried  on  a 
little  at  a  time,  year  after  year,  and  paid  for  in  taxes  by 
the  people,  so  well  as  to  be  completed  at  once  and  give 
the  people  the  use  of  the  improvement  while  they  are  pay- 
ing for  it.  It  is.  wrong  to  entail  upon  a  single  generation 
all  the  expenses  of  public  improvements,  sometimes  desira- 
ble and  necessary  in  a  single  year.  On  the  other  hand, 
the  public  debts  should  not  be  increased  so  as  to  impose 
an  excessive  burden  upon  future  generations.  While  the 
principle  of  public  debt  is  a  good  one,  it  should  be  guarded 
very  carefully  or  it  may  accumulate  a  burden  upon  the 
nation  which  eventually  will  lead  to  its  destruction.    Each 


ECONOMICS.  505 

generation  will  have  its  own  peculiar  burdens  to  bear, 
and  while  it  may  be  helped  and  given  power  to  act  by  the 
improvements  made  by  the  preceding  generations,  these 
improvements  should  not  be  so  great  as  to  heap  upon  suc- 
ceeding generations  such  a  burden  as  will  prevent  them 
from  taking  advantage  of  the  necessary  improvements  of 
their  own  times. 

The  public  debts  of  the  nations  of  the  world  have  become 
very  great.  Taking  the  national,  state  and  municipal  in- 
debtedness, the  amount  of  debt  is  appalling.  When  this 
expenditure  has  been  for  the  improvement  of  the  nation 
in  giving  it  power  and  facility  in  the  creation  of  wealth 
and  the  elevation  of  the  standard  of  life,  there  can  ba 
no  cause  for  alarm.  When  such  debts  have  been  heaped 
up  by  fruitless  wars  and  excessive  armament,  there  must 
be  cause  for  anxiety,  though  not  for  alarm.  An  estimate 
of  1882  made  the  public  debts  of  the  principal  nations  of 
the  world  amount  to  about  twenty-seven  billions  of  dollars. 

If  a  modern  city  proposes  to  give  its  people  the  benefits 
and  privileges  of  a  modern  government  in  regard  to  parks^ 
boulevards,  streets,  sidewalks,  water-works,  sanitation,  and 
police  system,  there  must  be  an  enormous  expenditure, 
which  ought  to  be  distributed  over  a  period  of  years  in 
order  not  to  make  taxation  become  a  burden  to  industry. 
If  a  city  must  build  a  public  hall  in  a  given  year,  it  is 
easy  to  see  that  the  payment  of  it,  if  raised  in  a  single 
year's  levy  in  addition  to  all  the  other  expenditures,  would 
be  an  excessive  burden  to  the  people.  There  is  only  one 
way,  and  that  is  to  distribute  it. 


606 


ECONOMICS. 


Imperfections  of  Government  Machinery. 

There  is  much  loss  in  the  assessment,  collection  and  ex- 
penditure of  public  revenue,  on  account  of  the  imperfec- 
tions of  government  machinery.  At  best,  a  method  of 
raising  revenue  and  managing  expenditures  is  expensive^ 
but  when  Americans  mix  their  politics  and  their  public 
business  in  such  a  way  as  to  destroy  the  best  principles 
of  government  financiering,  they  heap  upon  themselves 
needless  burdens.  Every  year,  men  are  chosen  for  office 
with  no  especial  adaptability  for  the  office  except  that  they 
have  gained  favor  in  serving  some  political  party  or  are 
friends  to  those  in  power.  Then,  after  they  have  spent  two 
or  three  years  in  learning  how  to  be  good  financiers,  we 
turn  them  out  of  office  and  put  other  ignoramuses  in  their 
places  in  order  to  educate  them  in  their  specialty.  We 
shall  succeed  in  public  financiering  just  in  proportion  as 
we  cease  to  mix  public  business  and  politics  in  the  adminis- 
tration of  affairs  of  state.  Nor  is  incompetency  our  only 
fault.  For,  while  government  officials  in  the  United  States 
as  a  whole  are  honest,  there  are  those  who  seek  public  pre- 
ferment for  the  sole  purpose  of  exploitation  of  the  govern- 
ment. The  political  conscience  respecting  duties  to  the 
government,  which  is  in  other  words  duty  to  the  public 
and  the  people,  seems  to  be  somewhat  warped. 

It  is  not,  then,  the  amount  of  money  collected  from  a 
given  people  that  should  be  any  cause  of  worry  to  them. 
It  is  the  question  of  whether  they  receive  ample  return 
for  its  expenditure  in  the  general  well-being  of  the  com- 
munity. Therefore,  in  the  assessment  of  taxes,  in  the 
collection  thereof,  in  their  expenditures,  in  the  needs  of 


ECONOMICS. 


507 


government,  and  in  the  perfection  of  government  machin- 
ery, there  needs  to  be  exercised  great  wisdom  on  the  part 
of  the  sovereign  people. 

References :  Taxation — Ely,  K.  T.,  Taxation  of  American  States 
and  Cities ;  Cossa,  L.,  Principles  of  Taxation  ;  Cooley,  Thos.,  Tax- 
ation; Seligman,  E.  R.  A.,  Essays  on  Taxation.  Finance — Adams, 
H.  0.,  Finance ;  Adams,  H.  C,  Public  Debts ;  Bastable,  0.  F.,  Pub- 
lic Finance ;  Plehn,  Oarl,  Introduction  to  Public  Finance. 


BOOK  V. 


METHODS  OF  ECONOMIC  INVESTIGATION, 


(509) 


CHAPTER  I. 

THE  FIELD   OF  INVESTIGATION. 

The  study  of  economics  cannot  in  any  way  be  complete 
to  the  modern  scholar  without  a  careful  investigation  of 
the  actual  economic  conditions.  Sometimes  this  part  of 
political  economy  is  called  practical  economics  as  distin- 
guished from  the  theoretical.  In  reality  it  cannot  be  con- 
sidered any  more  practical  than  a  study  of  the  principles 
of  economics,  for  the  whole  object  of  economic  investiga- 
tion is  to  reveal  economic  principles  in  the  actual  condi- 
tions of  life.  The  whole  object  of  political  economy  is  to 
study  economic  life,  for  the  ultimate  object  of  its  im- 
provement. As  investigation  without  understanding  the 
principles  would  be  of  no  avail,  so  principles  without  their 
application  would  not  fulfill  their  mission.  In  a  philo- 
sophic sense  neither  is  more  practical.  The  object  of  in- 
vestigation, then,  is  to  discover  new  truths.  In  a  univer- 
sity a  double  object  appears:  first,  the  discovery  of  the 
truth ;  and  second,  the  training  of  students  in  methods  of 
investigation. 

The  Library. 

The  first  consideration  is  the  library.  The  first  phase  of 
economic  investigation  is  found  in  ascertaining  and  under- 
standing what  others  have  done  before  by  way  of  collecting 
economic  statistics  or  developing  economic  principles.  The 
library  is,  therefore,  a  part  of  the  field  to  be  occupied  by  the 

investigator.    While  a  person  may  enter  the  field  of  inves- 

(511) 


512 


ECONOMICS. 


tigation  on  his  own  account,  regardless  of  what  others  have 
done,  it  will  be  to  a  large  extent  a  waste  of  time  and  energy, 
for  it  might  take  a  year  to  discover  by  actual  observation 
what  may  be  obtained  in  a  few  days  in  the  library  in  con- 
sidering the  results  of  investigations  of  others.  In  library 
investigation  there  is  something  more  to  be  considered  than 
the  mere  fact  of  learning  what  others  have  done.  Xew 
questions  are  arising  continually  in  the  subject  of  eco- 
nomics, which  must  be  traced  out  by  a  careful  compari- 
son of  all  material  bearing  directly  or  indirectly  upon  the 
subject,  and  a  logical  conclusion  reached.  This  requires 
a  careful  understanding  of  all  the  material  collected  on 

the  subject. 

Classification  of  Library  Material. 

References  and  discussions  of  the  subject  in  hand  will 
be  found  in  newspapers,  magazines,  volumes  and  docu- 
ments throughout  the  library,  which  must  all  be  noted, 
collected  and  weighed  before  using.  It  is  essential,  in  the 
study  of  these  sources,  to  make  a  proper  classification  of 
all  material.  There  are  to  be  considered  first  sources,  or 
what  might  be  called  original  sources.  These  include  doc- 
uments, written  or  compiled  by  actual  observers  of  the 
process  of  the  subjects  in  hand,  based  upon  the  actual  facts 
in  the  case.  l!^ext  to  these  sources  may  be  counted  au- 
thorities, written  by  masters  of  the  science,  who  in  using 
and  interpreting  original  sources  have  laid  down  funda- 
mental principles  which  are  considered  conclusive.  There 
are  a  large  number  of  secondary  writings  sent  out  largely 
for  the  purpose  of  propaganda,  or  to  emphasize  certain 
notions.  These  may  be  essays,  magazine  articles,  and 
newspapers.     Of  magazines,  those  that  are  especially  de- 


ECON^OMICS.  513 

voted  to  some  scientific  subject  contain  a  large  amount 
of  reliable  scientific  knowledge,  wbich  maj  pass  into  either 
the  classification  of  sources  or  of  authorities.  But  a 
large  portion  of  that  which  the  individual  finds  in  print 
will  be  of  little  practical  value  except  as  sketches  of  the 
actual  conditions  of  the  subject  under  investigation. 
Therefore,  the  student  who  enters  the  library  for  investi- 
gation must  have  a  careful  knowledge  of  the  use  of  the 
library,  and  make  a  great  study  of  the  collection,  classi- 
fication and  handling  of  the  material  there,  or  his  investi- 
gation will  be  in  vain. 

Field  Work. 
While  the  library  may  be  considered  the  foundation  of 
the  laboratory  method,  the  work  should  be  extended  into 
actual  life.  A  person  would  scarcely  be  called  an  economist 
of  the  first  order  who  had  not  inquired  on  his  own  account 
into  the  conditions  of  labor  and  capital,  trade  and  indus- 
try, interest,  profits  and  rents,  and  in  fact  all  the  eco- 
nomic conditions  of  life  around  him.  This  is  by  far  more 
difficult  than  the  library  investigation,  for  the  reliability 
of  sources  is  not  evident.  To  enter  a  laboring  camp  to 
inquire  into  the  relation  of  employer  and  employe,  the 
rate  of  wages,  standard  of  life,  requires  a  different  kind  of 
ability  from  that  required  in  library  research.  To  in- 
vestigate the  conditions  of  capitalistic  enterprise,  to  de- 
termine the  cost  of  production,  the  market,  the  laws  of 
supply  and  demand  in  actual  operation,  is  by  far  more 
difficult  than  taking  records  from  printed  pages,  but  it 
will  yield  larger  returns  in  vitalizing  the  library  pro- 
cesses.   It  helps  one  to  realize  the  nature  of  economic  law 


514  ECOITOMICS. 

and  the  scope  of  economic  principles.  It  changes  the 
economist  from  a  mere  philosopher  into  a  scientist.  It 
is  true  that  the  investigator  should  not  fail  to  avail  him- 
self of  such  general  statistics  as  may  be  published  from 
time  to  time  on  the  subject  of  his  investigation,  nor  should 
he  neglect  any  particular  statistical  work  or  information 
ascertained  in  the  specific  field  being  investigated.  In 
the  United  States  we  have  a  census  every  ten  years; 
the  annual  publications  of  the  National  Bureau  of  Labor 
Statistics;  the  annual  publications  of  the  agricultural  and 
educational  departments;  the  publications  of  the  Interstate 
Commerce  Commission ;  as  well  as  the  various  publications 
of  the  several  states  on  labor  statistics,  railroads,  agri- 
culture, and  education.  These  are  among  the  chief  per- 
manent statistical  sources  in  America.  To  be  added  to 
these  are  scores  of  lesser  reports  and  special  documents 
which  render  the  field  tolerably  complete.  Nor  should 
there  be  omitted  from  this  category  the  public  documents 
of  Congress,  and  the  various  state  legislatures  and  execu- 
tive departments,  as  well  as  the  reports  of  investigations 
carried  on  by  the  different  universities. 

Historical  Investigation. 

While  the  determination  of  the  conditions  of  the  pres- 
ent and  the  probability  of  the  future  are  the  chief  aims  of 
the  economic  science,  the  historical  field  should  not  be  ig- 
nored. While  it  is  not  essential  to  the  economist  that  he  be 
perpetually  delving  into  the  principles  of  Adam  Smith  and 
Ricardo,  historical  reviews  of  the  development  of  economic 
science  on  the  one  hand  and  of  industrial  history  on  the 
other  would  have  a  tendency  to  verify  the  principles  of  po- 


ECONOMICS. 


515 


litical  economy  and  to  strengthen  all  modern  investigation. 
When  anything  is  discovered  in  the  field  of  modern  science, 
the  investigator  should  know  at  once  whether  it  is  some- 
thing new,  or  the  recurrence  of  some  old  phenomenon  in  a 
different  form.  When  he  thinks  he  has  arrived  at  a  new 
principle  he  should  know  at  once  whether  it  has  ever  been 
advocated  or  presented  by  other  writers  or  investigators. 
To  this  end,  perhaps,  industrial  history  is  more  important 
than  the  history  of  political  economy,  for  it  presents  the 
various  changes  that  have  taken  place  in  the  development 
of  the  industries  of  the  country ;  it  gives  in  detailed  form 
the  actual  wealth  production  of  various  kinds,  and  outlines 
the  manner  in  which  this  has  changed  from  century  to 
century.  This  cannot  but  add  strength  to  the  inves- 
tigator. While  there  may  be  no  direct  connection  or 
similarity  between  the  corporations  of  Queen  Elizabeth's 
time  and  the  modern  corporation,  there  will  be  brought 
to  light  by  a  careful  study  of  the  former  certain  conditions 
of  life  which  will  aid  in  the  proper  handling  of  the  latter. 

Scope  of  Economic  Investigation. 

The  economic  investigator  is  limited  in  his  scope  only 
by  the  relations  of  wealth  production  of  man.  Any  phase 
of  economic  life  may  be  considered  as  a  part  of  his  field. 
He  should,  however,  draw  a  sharp  distinction  between 
actual  social  conditions  and  economic  relations.  All  forms 
of  production,  whether  of  the  raw  material  or  of  the  fin- 
ished product;  all  forms  of  exchange,  whether  foreign  or 
domestic ;  all  methods  of  transportation ;  everything  relat- 
ing to  labor  and  wages,  capital  and  interest,  land  and  rent, 
is  plainly  within  the  field  of  the  economic  investigator. 


516  ECONOMICS. 

Every  phase  of  economic  organization,  including  the  firm, 
the  corporation,  the  trust  and  monopoly,  and  labor  organi- 
zations, as  well  as  the  organization  of  industry,  are  worthy 
of  consideration.  The  producers  and  consumers  should  be 
the  subject  of  careful  investigation,  the  chief  aim  being  the 
verification  of  economic  principles,  the  vitalization  of  eco- 
nomic philosophy  and  the  modification  of  economic  laws 
by  actual  practice  and  business,  and  the  discovery  of  a 
new  law  or  the  determination  of  the  old  law  under  a  new 
form.  Such,  then,  should  be  the  scope  of  economic  inves- 
tigation. Wherever  man  appears  in  his  wealth-getting  and 
wealth-using  capacity,  there  should  go  the  investigator. 


ECONOMICS.  517 


CHAPTEK  II. 

THE  MODE  OF  PROCEDURE. 

The  Economic  Purpose. 
In  any  investigation  the  purpose  must  be  clearly  defined. 
Many  reports  liave  been  published  which  are  practically 
useless  because  there  has  been  no  well-defined  purpose  in 
the  investigation.  A  great  mass  of  unclassified  material 
has  been  presented,  in  which  the  vital  points  are  omitted. 
Attempt  as  you  will  to  determine  any  particular  proposi- 
tion, the  real  information  desired  is  lacking.  The  indi- 
vidual must  start  out  with  a  clearly  defined  notion  of  what 
he  is  to  ascertain,  and  he  must  collect  the  material  which 
will  best  present  it.  In  the  consideration  of  the  labor 
question,  for  instance,  it  may  be  desirable  to  give  a  com- 
plete review  of  the  entire  subject,  regardless  of  any  well- 
defined  object  to  be  gained,  except  a  general  understand- 
ing of  it  in  all  its  scope  and  details.  But  a  better  kind  of 
investigation  is  that  which  seeks  to  determine  some  phase 
of  labor,  such  as  the  rise  or  fall  in  the  rate  of  wages  in  a 
given  period  or  in  a  given  industry;  or  perhaps  the  rise 
and  fall  of  the  rate  of  transportation  of  a  given  railroad 
or  a  given  set  of  railroads ;  or,  to  narrow  it  even  more,  the 
rise  or  fall  in  the  rates  on  cattle  or  wheat  or  any  other  prod- 
uct whatever  within  a  given  period.  When  the  end  sough;; 
is  once  determined  upon,  all  material  should  be  gathered 

and  classified  in  reference  to  this. 
—32 


618  ECONOMICS. 

Gathering  Material. 

The  actual  records  of  procedure  from  day  to  day,  from 
month  to  month,  from  year  to  year,  must  be  determined. 
If  these  have  been  collected  and  summarized  for  him,  the 
work  of  the  investigator  is  comparatively  easy,  provided 
that  a  uniform  system  of  account-keeping  be  practiced. 
And  yet  a  score  of  questions  will  arise  in  the  outset  in  deter- 
mining the  material  to  be  collected,  and  the  method  of  pro- 
cedure. Thus,  if  the  rate  of  wages  is  considered,  it  will  be 
necessary  at  once  to  determine  who  are  wage-earners.  Will 
the  salaries  of  persons  receiving  one  hundred  dollars  per 
month  be  called  wages  ?  If  not,  will  salaries  of  people  re- 
ceiving twenty  dollars  per  month  be  called  wages  or  will 
wages  be  limited  by  what  has  been  determined  in  the  courts, 
the  daily  earnings  of  ordinary  physical  labor  ?  If  so,  how 
much  mental  capacity  will  one  be  allowed  to  use  in  ordi- 
nary physical  labor?  The  fact  is,  that  no  labor  is  con- 
ducted without  greater  or  less  mental  effort;  but  where 
shall  the  line  be  drawn  between  mental  labor  and  physical 
labor  ?  Then,  in  the  rates  of  wages  it  will  be  necessary,  in 
order  to  reach  any  determination,  to  consider  not  only  the 
average  normal  daily  wage,  but  the  number  of  days  em- 
ployed throughout  the  year.  How  will  this  be  ascertained '? 
Will  a  person  go  to  the  pay-roll  of  a  given  firm  ?  It  will 
show  that  certain  persons  were  employed  so  many  days. 
It  will  not  show  what  they  did  the  remainder  of  the  time. 
Will  you  find  out  the  individual  laborer  and  ask  him  how 
many  days  he  has  been  idle  or  what  his  average  wages  have 
been?  Outside  of  a  general  notion,  he  cannot  tell  you, 
because  he  keeps  no  account.  Thus  it  is,  that  the  more 
specific  one  attempts  to  become,  the  more  difiiculties  arise 


ECONOMICS. 


519 


in  scientific  exactness.  Suppose  all  the  firms  kept  a  strict 
account  of  everything :  even  then  the  work  of  the  investiga- 
tor is  not  light,  for  each  one  would  keep  his  accounts  in 
his  own  way.  Before  anything  could  be  done  they  must 
be  reduced  to  a  common  basis  of  measurements,  which 
reduction  might  be  quite  impossible  in  certain  cases.  Be- 
fore anything  of  value  can  be  done,  a  classification  of  all 
topics  discussed,  on  proper  blanks  prepared  for  the  purpose, 
will  be  necessary. 

The  purpose  having  been  clearly  defined,  it  will  not  be 
difficult  to  arrange  the  material  under  different  topics. 
Under  each  subhead  should  be  classified  the  material  as 
gathered.  Great  pains  should  be  taken  in  regard  to  exact- 
ness of  the  details,  otherwise  the  result  will  be  too  inexact 
for  use.  Owing  to  the  irregularities  which  one  finds  in 
the  actual  economic  conditions,  only  a  reasonable  degree 
of  probability  can  be  ascertained  through  any  statistical 
determination;  and  if  carelessness  prevails  in  the  collec- 
tion of  these  facts,  the  degree  of  probability  is  so  far  re- 
moved from  the  exact  conclusion  as  to  be  practically  worth- 
less. If  one  has  to  work  in  the  library,  a  complete  outline 
of  the  subject  should  be  made,  by  which  one  would  proceed 
from  step  to  step  to  the  conclusion  sought.  Great  care 
should  be  taken  in  the  arrangement  of  this  outline  to  ex- 
clude all  irrelevant  matter.  Yet  in  reading  one  should 
beware  not  to  carry  this  process  of  exclusion  too  far,  other- 
wise the  investigator  will  make  a  wrong  interpretation 
and  use  of  what  has  been  clearly  stated.  To  take  a  para- 
graph out  of  the  order  of  the  chapter  without  reference  to 
the  remaining  portion  might  lead  to  a  wrong  use  of  its  con- 


520  ECONOMICS. 

tents  in  establishing  any  given  proposition ;  therefore,  it 
is  quite  necessary,  for  the  proper  interpretation  of  authors, 
writers,  or  library  material,  to  read  widely  enough  to  grasp 
the. whole  matter. 

In  making  the  outline  one  should  consider  very  care- 
fully the  various  references  under  each  subject.  Before 
one  has  gone  very  far  on  the  way  as  an  investigator,  he 
must  know  the  general  scope  of  the  subject  and  the  material 
with  which  he  has  to  deal.  Therefore,  attached  to  the 
general  outline  should  be  a  system  of  references  of  classi- 
fied material.  It  is  indispensable,  also,  to  have  a  system 
of  recording  and  general  note-taking.  Perhaps  the  card 
system  is  the  most  convenient  of  all.  A  series  of  cards 
arranged  alphabetically  and  in  different  classes  for  the 
purpose  of  recording  and  classifying  material,  should  be 
arranged.  Class  A  should  be  sources,  either  library  work 
or  actual  observation ;  Class  B,  authorities ;  Class  C,  sec- 
ondary material,  etc.  On  each  card  should  be  recorded  the 
title  and  the  nature  of  the  contents  of  the  book  or  manu- 
script. A  system  of  note-taking  is  best  arranged  by  the 
card  system,  for  in  any  statistical  investigation,  whether 
carried  on  in  the  library  or  in  actual  field  work,  it  is  not 
possible  for  the  investigator  to  carry  in  his  mind  all  the 
details  of  the  investigation.  He  desires  to  take  notes  from 
observation  or  from  reading.  In  case  of  a  systematic  in- 
vestigation the  blank  when  filled  will  represent  a  logical 
method  of  note-taking ;  but  even  in  this  case  supplementary 
notes  may  be  necessary.  In  case  of  library  investigation, 
notes  are  usually  of  two  kinds:  First,  a  direct  quotation 
of  important  statements  or  statistics;   second,  a  summari- 


ECONOMICS.  521 

zation  of  book,  pag'6  or  chapter  in  the  investigator's  lan- 
guage. Great  care  should  be  taken  in  both  cases  to  attach 
to  the  note  the  exact  references  of  the  location  of  the  quo- 
tation or  statement,  giving  book,  chapter,  titles,  page,  etc. 
Excessive  care  is  necessary  to  make  the  quotation  exact, 
but  even  greater  care  is  necessary  that  the  investigator 
understand  the  author,  and  that  he  draw  the  proper  con- 
clusion in  his  own  language.  Investigators  frequently 
deceive  themselves  and  others  from  lack  of  proper  inter- 
pretation of  writings  or  representation  of  facts.  There- 
fore the  utmost  care  in  discernment  and  representation  is 
necessary. 

Accounting  and  Comparing:. 

Enumeration  is  not  easy,  at  best,  for  it  is  difficult  to  de- 
termine first  the  article  to  be  enumerated.  If  a  basket  con- 
taining oranges,  apples,  watermelons,  cantaloupes,  turnips 
and  peaches  should  be  presented  to  a  child,  and  he  were 
asked  to  count  the  number  of  pieces  of  fruit  in  the  basket, 
he  would  be  somewhat  puzzled  as  to  what  should  be  called 
fruit  and  what  vegetable — the  difficulty  of  determining 
a  unit  of  counting.  Ask  the  pupils  to  count  the  number 
of  pieces  of  chalk  in  the  blackboard  receptacle,  and  they 
may  have  a  very  difficult  task  of  what  seems  a  very  simple 
matter, — for  there  are  all  sizes,  from  the  full  crayon  to  the 
minutest  particle*  of  dust.  What  constitutes  a  piece  of 
chalk  must  be  determined  before  they  can  proceed.  Nearly 
all  the  difficulty  in  economic  theory  arises  from  this  very 
point  of  the  definition  of  terms, — merely  the  fact  of  count- 
ing. Authors  use  such  terms  as  profits,  interest,  rent,  and 
wages,  in  different  senses,  and  therefore  reach  different 


522  ECONOMICS. 

conclusions.  The  scope  and  meaning  of  tte  term  used  are 
not  the  same  in  the  minds  of  different  individuals,  there- 
fore controversy  as  to  conclusions  arisen.  The  same  idea 
prevails  in  the  gathering  of  statistics.  The  counting  must 
be  a  process  of  definition  and  exclusion.  The  difficulty  in 
field  work  is  that  of  observation.  This  must  be  carried  on 
with  great  accurateness  or  the  facts  in  the  case  will  not  be 
recorded.  To  take  in  all  the  conditions  that  may  arise  and 
use  only  the  data  necessary  for  reaching  the  conclusion, 
requires  practice  and  skill.  In  the  first  place,  economics 
treats  of  the  relation  of  man  to  wealth,  and  the  economist 
must  touch  upon  human  nature,  which  is  a  variable  quan- 
tity. The  geologist  dealing  with  rocks  without  life,  the 
chemist  with  organic  and  inorganic  matter,  the  biologist 
with  life  under  his  control,  have  more  or  less  permanency 
in  the  material  on  which  they  operate ;  while  the  economist 
must  operate  upon  material  with  its  own  individual  activ- 
ity. In  other  words,  the  laborer  may  refuse  to  disclose  his 
condition  or  the  capitalist  the  nature  of  his  business.  More 
than  this,  owing  to  the  variability  of  human  nature,  when 
an  honest  attempt  is  made  to  reach  a  conclusion  the  condi- 
tion and  nature  of  the  mind  will  render  this  more  or  less 
uncertain.  Hence,  in  all  economic  investigations  compar- 
ison is  absolutely  necessary  in  order  to  determine  the  rela- 
tive value  of  information.  This  comparison  should  be 
carefully  observed  in  all  material,  and  every  bit  of  infor- 
mation should  be  considered  as  to  its  degree  of  accuracy, 
modified  more  or  less  by  detracting  influences. 

Examples  of  Methods  of  Investigation. 
A  few  examples  of  methods  of  investigation  are  here 
given,  merely  for  the  purpose  of  suggestion.    They  are  not 


ECONOMICS.  523 

in  themselves  models,  but  rather  suggestions  of  methods  of 
procedure;  for  all  methods  of  procedure  must  vary  more 
or  less,  according  to  the  conditions  under  which  individuals 
work.  The  first  one,  on  labor,  is  an  outline  for  a  general 
discussion  of  the  subject,  including  the  work  in  the  library 
and  actual  investigation  in  the  field.  It  is  rather  suggest- 
ive to  beginners  who  desire  to  make  a  prolonged  investiga- 
tion of  the  subject.  Some  of  these  outlines  were  orig- 
inally made  by  students  in  economics  in  the  University 
of  Kansas,  under  the  direction  of  the  writer.  Those 
on  railroads  represent  various  phases  of  general  topics, 
and  were  made  through  the  study  of  the  legal  and 
economic  aspect  as  reported  in  statistical  reports,  laws,  and 
decisions  of  the  courts.  Those  regarding  packing-house 
employes  and  cooperation  in  England  and  the  Pullman 
strike  were  made  from  actual  observation.  There  is  no 
uniformity  of  representation,  for  the  reason  that  it  is  better 
that  methods  should  be  suggestive  rather  than  ideal,  as 
better  results  can  be  obtained  from  student  investigators. 
Scores  of  subjects  could  be  obtained  in  the  economic  field 
for  investigation;  and  as  students  become  more  scientific 
and  better  opportunities  are  offered  for  investigation,  a 
single  sub-topic  under  these  broad  generalizations  may  be 
sufficient  for  investigation. 

Example  1.  The  Labor  Question.  An  economic  investigation  to 
determine  the  relations  of  labor  to  capital.  (This  is  an  example  of 
covering  a  large  field  to  determine  general  results.  While  it  is 
excellent  for  general  knowledge,  it  is  not  as  profitable  as  a  small 
subject  thoroughly  worked  out  for  specific  results.) 
A.  Wages. 

1.  The  origin  of  the  wage  system. 


524 


ECONOMICS. 


2.  Laws  of  wages. 

(a)  Scientific  law  of  wages. 

(b)  Iron  law  of  wages. 

(c)  Wage-fund  theory. 

3.  The  relation  of  labor-income  (wages)  to  other  branches  of  in 

dustry. 

(a)  Relation  of  wages  to  capital-income. 

(6)  Relation  of  wages  to  net  product  of  labor, 
(c)  Relation  of  real  wages  to  nominal  wages. 

4.  Influences  upon  wages. 

(o)  The  sliding  scale  of  wages. 

(b)  The  tariff. 

(c)  The  eight-hour  law. 

(d)  Trusts  and  monopolies. 

(e)  Free  land. 

(/)  Improved  machinery. 

5.  Proposed  abolition  of  the  wage  system. 

B.  Labor  organization. 

1.  Origin  and  growth  of  organizations. 

2.  Classification  of  labor  organizations. 

3.  Aims  of  labor  organization. 

4.  Influence  of  organizations  upon  their  members. 

5.  Relation  of  organizations  to  strikes. 

6.  Relation  of  organizations  to  production. 

7.  Relation  of  organizations  to  wages. 

8.  Relation  of  organizations  to  politics  in  the  United  States. 

9.  Tendency  towards  universal  organization. 

10.  Weakness  of  organizations. 

11.  Needs  of  organizations. 

C.  Conflicts  between  labor  and  capital. 

1.  Statistics  of  strikes  and  lockouts. 

2.  The  moral  effect  of  conflicts  of  labor  and  capital. 

3.  The  effect  on  wages. 

4.  Convict  labor — a  cause. 

(a)  Four  systems — lease,  piece,  public,  and  contract. 

5.  Methods  of  conciliation. 

(a)  Private  agreement  on  a  wage  scale. 
(&)  Arbitration. 

i.  Compulsory. 

ii.  Voluntary. 

6.  Cost  of  controversies. 


ECONOMICS. 


525 


7.  Importance  of  unity  in  civilization. 
D.  The  settlement  of  the  labor  problem. 

1.  By  improved  conditions  of  labor: 

(a)  In  respect  to — 
i.  Health, 
ii.  Education, 
iii.  Morals, 
iv.  Social  relations. 
V.  Economic  condition. 
(6)  To  be  accompanied  by  legislation, 
i.  To  make  laws  for  — 

Protection  of  life. 

Security  of  wages. 

Settlement  of  disputes. 

Eestricting  employment  of  women  and  children 

Limiting  hours  of  a  day's  work. 

Regulating  labor  contracts. 

Regulating  trusts  and  monopolies, 
ii.  To  create  commissions  to  enforce  laws, 
iii.  To  restrict  immigration. 

2.  By  better  organization  of  industry  by  means  of — 

(o)  Cooperation. 
(6)  Profit-sharing. 

(c)  State  regulation. 

(d)  State  ownership. 

BIBLIOGRAPHY. 

Adams  —  The  Prevention  of  Railroad  Strikes.    (Annual  Report 

Commissioner  of  Labor,  25,  1896.) 
Bagehot— The  Transferability  of  Labor. 
Baker — Labor  and  Wages. 
Baring-Gould  — Labor  Question  in  Germany. 
Barnes— Plain  Questions  and  Practical  Answers. 
Bains — Labor  Problem. 
Bains — Trade  Unions  and  Arbitrations. 
Booth  — Labor  and  Life  of  the  People  of  London. 
Brassey — Work  and  Wages. 

Brentano  —The  Relation  of  Labor  to  the  Law  of  To-day. 
Brentano— History  and  Development  of  Guilds  and  Origin   of 

Trade  Unions. 
Brown  —  Studies  in  Modern  Socialism  and  Labor. 
Bureau  of  Labor  Statistics  of  Missouri  —History  of  Great  Strikes. 


526  ECONOMICS. 

Ghanning — Evolution  of  the  Working  Classes. 

Cook — Natural  and  Starvation  Wages. 

Cook — Are  Trade  Unions  a  Nursery  of  Socialism  ? 

Clark  —  The  Modern  Distributive  Processes. 

Clark — Labor  in  its  Relation  to  Wealth. 

Clark — Possibility  of  a  Scientific  Law  of  Wages. 

Clark— Wages  as  Affected  by  Combinations. 

Cummings — Actions  Under  the  Labor  Arbitration  Act. 

Ooglay — Laws  of  Strikes,  Lockouts,  and  Labor  Organizations. 

Donisthorpe  — The  Labor  Question. 

Dyer  — The  Evolution  of  Industry. 

Eliot— Addresses  to  Workingmen  by  Felix  Holt. 

Ely  —  The  Labor  Movement  in  America. 

Engels  —  Condition  of  the  Working  Classes  in  England. 

George  —  The  Condition  of  Labor. 

Gibbens  —  Industrial  History  of  England. 

Gilman  — Profit-Sharing. 

Giffen  —  Progress  of  the  Working  Classes. 

Gladden — The  Regulation  of  Industry. 

Gladden  — Working-People  and  Their  Employers. 

Gould  —  Housing  of  the  Working-People. 

Gunton — Evolution  of  the  Wage  System. 

Gunton — Wealth  and  Progress. 

Hamerton  —  Custom  and  Tradition. 

Harrison  —  Three  Typical  Workingmen. 

Holt — Addresses  to  the  Workingmen. 

Holyoake  —  History  of  Cooperation  in  England. 

Howell — Conflicts  of  Labor  and  Capital. 

Howell— Trade  Unions ;  New  and  Old. 

Hoyt  —  History  of  Immigration. 

Jevons  —  Questions  of  Labor  and  Capital. 

Jevons — The  State  in  Relation  to  Labor. 

Jevons — Trade  Societies;  their  Object  and  Policy. 

Jevons  —  The  Theory  of  Labor. 

Leo  XIII.— Letter  on  the  Conditions  of  Labor. 

Leslie  —  Movement  of  Agricultural  Wages  in  Europe. 

Mallock— Labor  and  the  Popular  Welfare. 

McNeil  —  The  Labor  Movement. 

Merriweather — Factory  Life. 

Mill  — The  Claims  of  Labor. 

Newcomb — A  Plain  Man's  Talk  on  the  Labor  Question. 


ECONOMICS. 


627 


Newton  — A  Bird's-eye  View  of  the  Labor  Question. 

Newton  —  Is  the  Rate  Just  to  the  Workingman  ? 

Phillips  —  Foundation  of  the  Labor  Movement. 

Phapem  —  Redemption  of  Labor. 

Phapem  —  Wages . 

Parrett — Labor  Movement  in  English  Politics. 

Powers  — Labor. 

Powderly  —  Thirty  Years  of  Labor. 

Ral  — Eight  Hours  for  Work. 

Ricardo  —  Rent,  Values  and  Profits. 

Rogers — Legislation  on  Labor,  and  its  Effects. 

Rogers  —  Movements  of  Life  Immigration. 

Rogers  —  Six  Centuries  of  Work  and  Wages. 

Ryan  —  Arbitration  Between  Capital  and  Labor. 

Schaeffle  —  Theory  and  Policy  of  Labor  Protection. 

Scharz  —  Honest  Money  and  Labor. 

Seward — Chinese  Immigration  in  the  Social  and  Economic  Aspects. 

Smith  —  Emigration  and  Immigration. 

Special  Consular  Reports,  Vol.  II,  pp.  209-332.    ( 1890.) 

Spyers  — The  Labor  Question. 

Suteer— The  Rights  of  Labor. 

Taussig  —  Wages  and  Capital. 

Thompson  —  Tyranny  of  Trade  Unions. 

Trant  — Trade  Unions. 

Toynbee  —  Wages  and  Natural  Law. 

Toynbee  — Industrial  Revolution. 

Willoughby  —  Child  Labor . 

Young — Labor  in  Europe  and  America. 

Walker  — The  Wages  Question. 

Walker — Effects  on  the  Manual  Laboring  Class. 

Whittaker — Politics  and  Industry. 

Wood  —  Theory  of  Wages. 

Wright  —  Labor  Laws  in  the  United  States. 

Wright — Strikes  and  Lockouts. 

Wright  —  Profit-Sharing. 

Wright  —  Distributive  Cooperation  in  England. 

Wright  —  The  Working-Girls  of  Our  Large  Cities. 

Example  2.  Railroad  Rates.  An  economic  investigation  to  de- 
termine whether  rates  are  decreasing  more  rapidly  than  expenses. 
I.  Development  of  tariffs. 


528  ECONOMICS. 

A.  Classification  of  freight. 

Eeferences:  Report  of  Interstate  Commerce  Com.,  1888, 
pp.  34-41 ;  Hadley,  Railroad  Transportation,  pp.  112, 113 ; 
11th  Annual  Report  Interstate  Commerce  Commission, 
pp.  62-71. 

B.  Discrimination. 

References :  Stickney ,  Railway  Problem,  pp.  45-71, 154-161 ; 
Hadley,  Railroad  Transportation,  pp.  lOQ-125;  Dixon, 
State  Railroad  Control,  pp.  48-75 ;  Kirkman,  Rates  and 
Government  Control,  pp.  67,  95,  97,  123,  127.  Pop.  Sc. 
Mo.,  28:424. 

C.  Competition. 

References:  Hadley,  Railroad  Transportation,  pp.  63-99; 
Stickney,  Railway  Problem,  pp.  58-71,  36-44;  Kirkman, 
Railroad  Rates. 

II.  Theories  of  Rates. 

A.  Cost  of  Service. 

References:  Hadley,  Railroad  Transportation,  pp.  108-9, 
261-5;  Stickney,  Railway  Problem,  pp.  45-6;  Kirkman, 
Railroad  Rates  and  Government  Control,  pp.  19,  74,  83, 
220. 

B.  Value  of  the  service  on  what  the  traffic  will  bear. 

References:  Hadley,  Railroad  Transportation,  pp.  16-7, 
110-1,  261-5;  Kirkman,  Railroad  Rates  and  Government 
Control,  pp.  13,  30-2,  43;  Econ.  Jr.,  5:438,  7:317;  An. 
Am.  Acad.,  3:102,  5:335,  11:324. 

III.  State  control  or  regulation  of  rates. 

A.  By  ownership  of  roads. 

References :  Hadley,  Railroad  Transportation,  pp.  203-258 ; 
Kirkman,  Railroad  Rates  and  Government  Control,  pp. 
219-231 ;  Amer.  Law  Rev.,  18:302. 

B.  By  legislative  enactment. 

(a)  Maximum  rates. 

References:  Hadley,  pp.  129-134;  Dixon,  pp.  26-30; 
Kirkman,  pp.  24,  40,  123. 

(b)  Commissions. 

References:  Hadley,  pp.  135-141;  Dixon,  pp.  150-56, 
194-97 ;  Larrabee,  The  Railroad  Question,  pp.  428-30, 
381;  Amer.  Econ.  Assn.  Pub.,  6:477;  Eng.  Mag., 
9:623;  Pol.  Sc.  Quart.,  11:201. 

(c)  Reasonable  rates. 

References:  Dixon,  pp.  38-41;  Larrabee,  pp.  376-88, 
361,  365  ;  Kirkman,  pp.  14-15, 18,  45,  199 ;  An.  Amer. 
Acad .  Pol.  Sc. ,  5 :  335  ;  Nation ,  66 :  260 ;  Rev.  of  Rev. , 
17:402;  Pub.  Opinion,  24-330;  Index  Interst.  Com. 
Com.  Repts. 


ECONOMICS. 


529 


IV.  Present  rates  in  the  United  States. 

A.  Compared  with  rates  of  other  countries. 

References:  Hadley,  p.  104;  Larrabee,  pp.  370-3. 

B.  Compared  with  former  rates. 

References:  Hadley,  pp.  104-8;  Dixon,  pp.  43-44;  Larra- 
bee, 874-5,  417;  Kirkman,  pp.  27,  175;  8th  An.  Rept.  of 
Statistics  of  R.  R.  in  U.  S.,  p.  142;  Pop.  Sc.  Mo., 47: 186; 
Jr.  Pol. Econ. ,  6 :  457 ;  An.  Statistical  Assn. , 6 :  115 ;  Forum, 
18:250;  Interstate  Com.  Com.  Repts.,  1898,  p.  35;  1890, 
p.  70. 
V.  Effect  of  pools. 

References:  Larrabee,  pp.  189-204;  Kirkman,  pp.  95-116, 
129-48;  11th  An.  Rept.  Interstate  Com.  Com.,  pp.  48-51 ; 
Eng.  Mag.,  1:105;  Forum,  20:519;  Index  Interstate 
Com.  Com.  Repts. 

Greneral  suggestions  for  concrete  investigation :  Interview 
shippers  and  railroad  oflBcials ;  examine  schedule  of  rates 
and  railroad  books. 

Example  3.  Interstate  Commerce  Law.    An  economic  investiga- 
tion to  determine  the  present  state  of  such  laws. 

I.  History  of  the  attempts  of  the  states  to  regulate  the  business  of 

carriers. 
References:  Case  of  Munn  v.  111.,  94  U.  S.  113 ;  C.  B.  &  Q.  R.  v. 
Ia.,94TJ.  S.  155;  Peck  v.  Chicago  and  North  Western  R.  R., 
94  U.  S.  164;  Wabash,  St.  Louis  and  Pacific  R.  R.  v.  111.,  118 
U.  S.  557. 

II.  Legal  meaning  of  and  liability  of  "common  carrier."    Any 

text  on  Bailment. 

III.  Read  the  law  carefully  to  discover — 

1.  Its  purpose  and  object. 

2.  The  means  prescribed  for  accomplishing  this  object. 

3.  Punishment  for  disobedience. 

4.  To  whom  the  act  applies. 

5.  Who  are  especially  excepted  from  its  operation. 

6.  When  is  the  common  carrier  excepted  from  its  provisions  ? 

7.  What  constitutes  the  commission. 

8.  The  qualifications  of  a  commissioner. 

9.  The  powers  of  the  commission. 

10.  Who  may  make  complaint  before  the  commission. 

11.  The  effect  of  the  decision  of  the  commission. 

BIBLIOGRAPHY. 

Alexander,  E.  P. —  Railway  Practice. 
Bonhon,  J.  M.— Railroad  Secrecy  and  Trusts. 


630 


ECONOMICS. 


Dabney,  W.  D. —  The  Public  Regulation  of  Railways. 
Dixon,  F.  H. —  State  Railway  Control. 
Dos  Passos,  John  R. —  The  Interstate  Commerce  Act. 
Farrar,  T.  H.— The  State  in  its  Relation  to  Trade.  Chaps.  8, 10, 12. 
Hadley,  A.  T. —  Railway  Transportation. 
Hole,  James  —  Nationalization  of  Railways,  Chaps.  1-4. 
Stickney,  A.  B. —  The  Railway  Problem. 
Stickney  —  State  Control  of  Trade  and  Commerce. 
H.  T.  Newcomb  in  N.  Amer.,  Dec.  1898  —  Opposition  to  Railway 
Pooling. 

Roswell  Miller,  in  N.  Amer.,  Dec.  1898 — Decision  against  Railway 
Pooling. 

M.  H.  Smith,  in  N.  Amer.,  April,  1898  — Railway  Pooling  vs.  The 
Interstate  Commerce  Commission. 

Charles  A.  Pronty,  in  N.  Amer.,  Nov.  1898  — Powers  of  the  Inter- 
state Commerce  Commission. 

Chas.  A.  Pronty,  in  Forum,  April,  1899  — Powers  of  Interstate 
Commerce  Commission. 

A.  F.  Walker,  in  Forum,  17 :  207  —  The  Interstate  Commerce  Law ; 
has  it  been  Beneficial  ? 

The  Farmer  and  Railroad  Legislation,  Century,  21:  780. 

I.  G.  Rice,  in  Forum,  17 :  676,— Legalized  Plunder  of  Railroad  Prop- 
erty ;  the  Remedy. 

C.  D.  Wright,  in  Forum,  18:704  — Steps  Toward  Government  Con- 
trol of  Railroads. 

J.  A.  Latcha,  in  N.  Amer.,  Aug.  1897  —  Pooling  Railway  Earnings. 

H.  F.  Newcomb,  in  Pop.  Sc.  Mo.,  Oct.  1897  — A  Decade  in  Federal 
Regulation  of  Railways. 

G.  R.  Blanchard,  in  Forum,  23:385  — The  Trans-Mississippi  De- 
cision. 

Example  4.  Railroad  Accidents.     An  economic  investigation  to 
determine  the  cause  of  accidents,  and  by  what  means  they  may  be 
minimized. 
A.  Who  are  victimized  in  railroad  accidents  ? 

(Interstate    Commerce    Commission    Reports,     1889-98; 
Bank.  Mag.,  53:827;  Jr.  Sc,  127;  Am.  Arch.,  11:218.) 

I.  Number  killed  and  wounded  annually. 

(a)  Employes. 

(6)  Passengers. 

(c)  Trespassers  and  non- trespassers. 

II.  Number  by  groups. 

(Interstate  Commerce  Commission  Reports,  1889-1898.) 


ECONOMICS. 


531 


B.  How  many  kinds  of  accidents. 

( Interstate  Commerce  Commission  Reports.) 
I.  Accidents  of  the  first  class. 

1.  Enumerated. 

(a)  Coupling  and  uncoupling  cars. 
(6)  Falling  from  trains  and  engines, 
(c)  Overhead  obstructions. 

2.  Number  of  individuals  killed  and  injured  in  first  class. 
IT.  Accidents  of  the  second  class. 

(a)  Collisions  —  Rear  end,  head  end,  and  side. 

(F.  C.  Adams,  R.  R.  Accidents,  pp.  61-2,  144-52,  265.) 
(6)  Derailments. 

(Adams,  pp.  13,  16,  23,  54,  79,  84,  118,  120.) 
(c)  Number  of  individuals  killed  and  injured,  of  each  class 
of  victims. 
III.  Accidents  of  the  third  class. 

1.  Enumerated. 

(a)  Other  train  accidents. 

(b)  At  highway  crossings. 

(Adams,  pp.  165,  170,  244,  258.) 

(c)  At  stations. 

(Adams,  p.  166.) 
{d)  Other  causes. 

2.  Number  killed  and  injured  of  each  class  of  victims. 
0.  What  are  the  causes  of  railroad  accidents  ? 

(Adams,  R.R.  Accidents,  pp.  12, 16,  67,  72,  82,  89, 100, 106,  111, 
117,265.) 
I.  Patent  causes. 

1.  Overtaxed  trainmen. 

(Recent  R.  R.  Accidents,  Pop.  So.  Mc,  44:314.) 

2.  Rapid  transportation. 

(Pop.  Sc.  Mo.,  44:  314.) 
8.  Lack  of  proper  signal  system. 
(Adams,  p.  86.) 

4.  Too  dense  traffic  upon  one  track. 

( Pop.  Sc.  Mo.,  44 :  314 ;  No.  Amer.,  157 :  707.) 

5.  Mistaken  or  missent  train  orders. 

(  Adams,  pp.  66,  69.) 

6.  Unskilled  employes. 

(a)  Negligence.     (Adams,  p.  125;  No.  Amer.,  157:  777.) 
{b)  Mistakes  of  officers  or  servants.    (Adams,  p.  125;  No. 
Amer.,  157:707.) 


532  ECONOMICS. 

II.  Latent  causes. 

1.  Defective  machinery  —  track,  wheels,  axles,  and  couplings. 

2.  Poorly  constructed  cars,  track  and  bridges. 

( Adams,  pp.  58,  117,  46,  98,  99,  107,  166,  206,  266.) 

D.  What  preventives  of  railroad  accidents  are  there,  and  how- 

many  are  available  for  use  ? 
(Barry's  R.R.   Appliances ;  Interstate  Commerce  Commis- 
sion; Adams,  pp.  19-70;  Pub.  Opinion,  2:273.) 

I.  Automatic  oar-couplers  —  a  necessity. 
(Cong.  Record,  52d  Cong.,  Vol.  24,  Part  3.) 

II.  Automatic  train  brakes  —  a  substitute  for  hand  brakes. 
(Adams,  pp.  21,  125,  190.) 

(a)  Number  in  use,  and  result. 

III.  Interlocking  signal  system. 

(Adams,  pp.  97, 182, 192,  194-196;  Barry's  R.  R.  Appliances, 
p.  113;  2d  Annual  Report  Mass.  R.  R.  Com.,  p.  141.) 

IV.  Block  signal  system. 
(Adams,  pp.  43,  47,  51,  255.) 

E.  Cost  of  accidents. 

(Adams,  p.  267.) 
(a)  Employers*  liability  acts.    ( See  statutes  of  various 
states.) 

Example  5.  Canals  and  Their  Relation  to  Railroads.  An  eco- 
nomic investigation  to  determine  relative  cheapness  of  transporta- 
tion by  rail  and  by  water. 

I.  The  history  of  canal  building. 

Eclectic  Eng.,  Vol.  10,  p.  227. 

E.  J.  James — Am.  Econ.  Assn.  Pub.,  Vol.  V. 

II.  The  advantages  of  railroads  over  canals. 

1.  Any  locality  may  be  reached. 

James  — Niles  Register,  Apr.  30th,  July  30th,  1825. 
E.  H.  Derby— Harper,  Mar.  1880. 

2.  The  rate  of  travel  is  greater. 

E.  J.  James— Eclectic  Eng.,  Vol.  21,  p.  381. 

3.  Capacity  of  railroads  unlimited ;  that'  of  canals  limited. 

L.  M.  Haupt— Amer.  Ec.  Assn.  Pub.,  Vol.  V. 
E.  J.  James. 

4.  Canals  limited  by  seasons  of  the  year. 

E.  J.  James. 

5.  No  losses  as  in  the  case  of  absorption  in  canals. 

E.  J.  James. 


ECON^OMICS.  533 

III.  Advantages  of  canals. 

1.  They  develop  the  country. 

Eclectic  Eng.,  Vol.  10,  p.  227. 

2.  They  join  water-ways. 

E.  J.  James. 

3.  Cost  of  transportation  by  water  is  less  than  by  rail. 

L.  M.  Haupt. 

4.  Canals  carry  heavy  traflac- 

E.  J.  James. 

5.  Benefit  railways. 

E.  J.  James. 

Example  6.  Productive  Cooperation  in  England.  An  economic 
investigation  to  determine  the  possibility  of  the  success  of  pro- 
ductive cooperation. 

I.  The  present  condition  of  cooperation. 

A.  As  shown  by  exhibition  at  Crystal  Palace,  Aug.  18-22,  1896. 

B.  As  learned  by  association  with  labor  leaders  of  England. 

II.  The  failure  (till  1870)  of  productive  cooperation,  but  success  of 

distributive  cooperation. 
A.  Due  to  greater  difficulty  of  management. 

III.  Review  of  success  and  failure  of  cooperation. 

A.  The  Rochdale  Pioneers.    ( Successful  productive  enterprise.) 

1.  The  meager  beginning. 

2.  Present  condition  of  the  society  ;  membership,  number 

of  establishments,  capital,  annual  business,  profits. 

3.  Effect  upon  country  of  establishing  societies. 

B.  The  Labor  Association.   ( 1884.) 

1.  Purpose  —  to  form  public  opinion  on  the  subject  of  asso- 

ciated labor. 

2.  Means — lectures,  publications,  conferences,  etc. 

C.  Hebden  Bridge  Fustian  Mfg.  Cooperating  Societies. 

1.  Organized  1870. 

2.  Poverty  of  association  and  members. 

3.  Growth  illustrated  by  table. 

IV.  General  methods  existing  among  the  societies. 

A.  Division  of  profits  with  purchasers. 

B.  Setting  aside  amounts  for  education,  sick,  etc. 

C.  Establishment  of  stores. 

D.  Division  of  gross  profits. 

E.  Management  of  society. 


534  ECONOMICS. 

V.  Summary  of  growth  of  cooperation  as  shown  by  table. 
yi.  Conclusion. 

A.  Objects  aimed  at. 

(a)  To  benefit  the  laborer. 
(6)  To  benefit  the  employer. 

B.  Beneficial  effect  of  productive  cooperation  on  society. 

Example  7.  The  Condition  of  the  Packing-House  Employes  ( in 
Armour  Packing  House,  Kansas  City,  Mo.).  An  economic  investi- 
gation to  determine  the  standard  of  life  of  the  laborers. 

I.  Location. 

II.  Study  of  the  plant  by  departments. 

A.  The  following  departments : 

Canning  room,  tin  shop  or  canners*  room,  lithography, 
boning  room,  poultry  room,  sausage  room,  tank  room, 
hog-killing,  carpentering  and  brick  masonry,  hog-cut- 
ting. 
Supply  Department  —  Sausage  trimming,  curing,  smok- 
ing and  pickling,  laundry,  hog-cleaning,  ice  plant, 
butterine,  tin  shop,  fertilizer,  hides,  neutral,  store 
room,  packing  and  lard,  car  shops,  machine  shops, 
carpenter  shops,  paint  shop,  glue,  fire  department, 
cooperage,  lard,  box  house,  sheep,  market  pigs,  beef 
killings,  beef  casing,  new  tank  room,  oleo  oil,  electric 
light  plant,  No.  3  engine  house,  local  shipping,  packing 
room,  livery  stable,  roustabouts,  unloading,  beef  load- 
ing. 

B.  Study  for  the  purpose  of  obtaining  information  in  respec* 
to  — 

1.  Number  of  persons  employed  ( men,  boys,  women,  girls, 

negroes ). 

2.  Pay.   (Compare  as  to  sex,  age,  color,  etc.,  for  same  work.) 

3.  Moral  character  of  employes. 

4.  Length  of  time  employes  have  been  at  the  same  work. 

5.  Kind  of  men,  as  to  intelligence,  industriousness,  and 

sobriety. 

6.  Membership  in  lodges  or  societies,  life  insurance. 

7.  Provision  made  by  owner  for  comfort  and  health  of  em- 

ployes. 

8.  Healthfulness  of  different  kinds  of  work. 

9.  Summary  and  conclusions  drawn. 


ECONOMies.  535 

III.  Study  of  smrrourxdings  and  places  of  living. 

A.  Restaurants  and  eating-houses. 

1.  Company  restaurant. 

2.  Other  restaurants. 

3.  Saloons. 

B.  Homes  of  employes  ( in  west  bottoms  )•    Noted  as  to  — 

1.  Cleanliness. 

2.  Crowded  condition. 

3.  Sources  of  supplies. 

4.  Rents. 

5.  Character  of  persons. 
C  Gambling-houses. 

D.  "The  Patch.'' 

E.  Churches. 

F.  Schools. 

IV.  Suggestions  for  needed  improvements. 

Example  8.  The  Municipal  Government  of  Berlin.  An  economic 
investigation  to  determine  the  success  of  scientific  methods  of 
municipal  government. 

I.  Introduction. 

A.  Location  of  city.    On  rivers. 

B.  Rapid  growth  of  city.     Reasons  for  — 

(a)  Location  of  the  ruling  families  there. 
(6)  Power  of  organization  and  scientific  methods  in  public 
work? 

II.  Machinery  of  city  government. 

A.  Council. 

(a)  Elected. 

1.  Qualifications  of  electors. 
(6)  Number  of  members — 126. 
(c)  Power. 

1.  Appoint  Burgomeister  (Mayor). 

2.  Choose  committee  of  magistrates  —  30. 

B.  Police. 

(a)  How  appointed. 

1.  Regular  police  by  the  State,  and  paid  by  the  State. 

2.  Watchmen  appointed  and  paid  by  the  city. 
(6)  Powers. 

1.  Complete  enforcement  of  all  laws. 

2.  Collection  of  full  information  in  regard  to  all  cit- 

izens, temporary  or  permanent. 


536  ECONOMICS. 

III.  City  government  as  found  in  municipal  affairs. 

A.  Means  of  communication. 

1.  Post. 

2.  Post  express. 

3.  Pneumatic  tube. 

4.  Telephone. 

B.  Means  of  transportation. 

1.  Kinds. 

(a)  Horse  cars. 
(6)  Electric  cars. 
(c)  Steam  railway. 

2.  Management. 

(a)  Private  ownership. 
(6)  Regulation  by  the  city. 

3.  Methods  of  construction. 

C.  Street  pavements. 

1.  Construction. 

2.  Care. 

D.  Care  of  public  health. 

1.  Cleaning  of  streets. 

2.  Sewerage  system. 

3.  Park  system. 

4.  Disinfectant  houses. 

5.  Meat  inspection. 

6.  Water-supply. 

7.  Supervision  of  building  constructior 

E.  Lighting. 

1.  Gas  —  city  and  private  company. 

2.  Electric  —  private  company. 

F.  Granting  franchises. 

1.  Gas. 

(a)  Reservations  by  the  city. 

(b)  Per  cent,  of  receipts  required  by  city. 

(c)  Privilege  of  city  to  extend  service  at  will. 
{d )  Regulation  of  charges. 

(e)  Right  to  purchase  by  city. 

2.  Railway. 

(a)  Bonus  to  city. 

(6)  Yearly  percentage  of  earnings  to  city. 

(c)  Passes  to  city  after  certain  length  of  time. 

G.  Care  of  poor. 


ECONOMICS.  '^>37 

IV.  Conclusion. 

A.  City  of  Berlin  a  business  corporation. 

B.  Lessons  drawn  for  American  cities. 

1.  Economy  in  all  departments. 

2.  Necessity  for  business  ability  and  methods. 

3.  Should  not  be  a  political  machine. 

Example  9.     The  Prussian  Railroad  System. 

I.  History  of  the  Prussian  railroad  system.  ^ 

II.  Laws  regulating  the  public  carriers,  especially  railroads. 

III.  Laws  relating  to  the  construction  and  operation  of  railroads. 

IV.  State  and  private  ownership  of  railroads. 

1.  How  state  ownership  was  brought  about. 

2.  Number  of  miles  operated  by  the  state. 

3.  Number  of  miles  operated  by  private  corporations. 

4.  Advantages  and  disadvantages  of  the  state  system. 

V.  Tariffs. 

1.  Freight. 

A.  Classification  of  freight  tariff  and  freight. 

2.  Passenger  tariffs  or  fares. 
A.  Classification. 

3.  Earnings  — gross,  net,  gross  passenger,    net  passenger, 
gross  freight,  net  freight. 

VI.  Expenditures. 

1.  For  extension  of  roads  or  construction  of  new  lines. 

2.  For  repair  of  tracks,  bridges,  etc. 

3.  For  maintenance  of  road-bed. 

4.  For  new  depots  and  repairs  to  old  ones. 

5.  Purchase,  construction  and  repairing  of  engines. 

6.  Purchase,  building  and  repairing  passenger  and  freight 

cars. 

7.  Salaries. 

VII.  Employes. 

1.  Classification  of  employes. 

A.  Officers. 

B.  Clerks. 

C.  Workmen. 

2.  Wages  of  employes. 

3.  Laws  relating  to  employes. 

A.  As  to  entrance  into  the  service. 

B.  As  to  length  of  service. 


538 


ECONOMICS. 


C.  As  to  promotion. 

D.  As  to  privileges. 

E.  As  to  dismissal. 

F.  As  to  operation. 

G.  Education. 

H.  Length  of  working  day  or  working  period. 

VIII.  Hospitals. 

IX.  Libraries,  reading-rooms,  etc. 

X.  Industrial  schools. 

XI.  Other   educational    institutions    for   training    of  employes, 

nurses,  etc. 

XII.  Statistical  tables  to  accompany  each  of  the  above  subjects. 

BIBLIOGRAPHY. 

Government  Ownership  of  Kailroads.    Forum,  Vol.  XVIII,  p.  704. 
Prussian  Railroad  System.     G.  Cohan.    J.  Pol.  Sc,  Vol.  I,  p.  179. 
Eisenbahnen  (Prussian  system).  H.  Conrad.  J.  Pol.  Sc,  Vol.  Ill, 

pp.  147-223. 
State  Ownership.    Gunton's  Mag.,  Vol.  Ill,  p.  52. 
Prussian  Railroad  System.    Annals  Amer.  Acad.,  Vol.  Ill,  p.  389. 
Railroads  and  the  State.    Chau.,  Vol.  Ill,  p.  413. 
Government  Ownership  of  Railroads.    Cosmopolitan,  Vol.  II,  p. 

365. 
Government  Ownership  of  Railroads.    J.  Soc.  Act.,  Vol.  IV,  pp. 

391-645,  662. 
Government  Ownership  of  Railroads.    Nation,  Vol.  LI,  p.  205. 
Government  Ownership  of  Railroads.    Eng.,  N.  Y.,  Vol.  I,  pp. 

592-741. 
Prussia  and  Pruss.  R.  R.  System.    Eng.  N.  Y.,  Vol.  I,  p.  236. 
Prussia  and  Pruss.  R.  R.  System.    Nat.,  Vol.  XXVIII,  p.  298. 

Prussia  and  Pruss.  R.  R.  System.    Nat.,  Vol.  XXXIII,  p. . 

Prussia  and  Pruss.  R.  R.  System.    Nat.,  Vol.  XXXIV,  p.  224. 
Prussia  and  Pruss.  R.  R.  System.    Nat.,  Vol.  XXXVI,  p.  100. 
Prussia  and  Pruss.  R.  R.  System.    J.  Soc.  Acts,  Vol.  XIV, p.  34-197. 
Prussia  and  Pruss.  R.  R.  System.    Nat.,  Vol.  XXXVII,  p.  137. 
Russia.     Chambers,  J.,  Vol.  XVIII,  p.  177. 
Russia.    Chambers,  J.  M.,  Vol.  V,  p.  335. 
Russia.    Fortnightly  Mag.,  Vol.  XXV,  p.  67. 
Comparative  Railroad  Statistics.    Prus.  Pract.  Mag.,  Vol.  V. 
Austrian  Railroad.    Annals.  Am.  Acad.  Pol.  Sci.,  Vol.  I,  p.  345. 
History  of  the  German  Empire.    Von  Sybel,  Vols.  I,  II,  III. 


ECONOMICS. 


539 


Consular  Reports,  Nos.  170,  186,  189,  205. 
Highways  of  Commerce.    Consular  Reports,  Vol.  XII. 
The  Prussian  Railroad  System.    Carrol  D.  "Wright,  Pub.  Bureau  of 
Statistics  and  Labor. 

The  following  additional  topics  for  investigation  are  given  for 
students : 

The  legal  status  of  trusts. 

The  economic  effect  of  trusts. 

The  economic  effect  of  excessive  life  insurance. 

The  economic  advantages  of  speculation. 

The  evil  effects  of  illegitimate  speculation. 

To  what  extent  is  a  labor  organization  a  trust  ? 

The  question  of  strikes. 

Effect  of  labor  organizations  on  wages. 

An  inquiry  into  the  standard  of  life  of  laborers. 

Economic  effect  of  irrigation. 

Consumption  of  laborers. 

The  economic  effect  of  suburban  and  rural  electric  lines. 

Monopoly  and  monopoly  profits  of  railroads. 

Excessive  capitalization  of  "  industrials." 

The  wages  of  miners  in  relation  to  the  price  of  coal,  etc.,  etc. 

(This  list  may  increased  as  needed.) 


INDEX. 


Abstinence,  115. 

Adam  Smith,  40,  48,  49,  65,  444; 
on  taxation,  468. 

Ager  publicus,  98. 

Agriculture,  22;  and  transpor- 
tation, 83;  laws  of  income 
from,  79;  limited  returns  of, 
81. 

Agricultural  area  in  the  United 
States,  86;  products,  variety 
of,  88. 

American  federation  of  labor, 
223. 

American    railway    union,    225. 

Anarchism,  252. 

Animals,   domestication   of,    22. 

Aquinas,  Thomas,  178. 

Arbitration,  237 ;  compulsory, 
238;  in  England,  238;  in 
New  Zealand,  238;  volun- 
tary, 238. 

Aristotle,  on  interest,  177;  pol- 
itics of,  241. 

Assessment,  inequitable,  498. 

Augustine,  St.,  City  of  God,  243. 

Babeuf,  247. 

Balance  of  trade,  366. 

Bank  of  England,  349;  of 
France,  350. 

Bank  notes  and  paper  money, 
340. 

Banks,  as  centers  of  business, 
347;  national,  351;  postal 
savings,  355;     savings,   355. 

Banking,  condition  of,  354;  sys- 
tem, a  sound,  348;  rise  of, 
347. 

Belgium,  defectives  in,  103. 


Bimetalism,  339. 

Blanc,  Louis,  252. 

Boehm-Bowerk  and  interest,  181. 

Budget,  the,  503. 

Bullock,  waste  of  foods,  288. 

Caret,  Etienne,  248. 

Cairnes,  49. 

Canadian  banking  system,  354. 

Canonists  and  interest,  178. 

Capital,  accumulations  of,  118; 
circulating,  116;  concrete, 
118;  economic  significance  of, 
120;  fixed,  116;  free,  117; 
momentum  of,  119;  nature 
of,  114;  organization  of,  30; 
pure,    118;     specialized,    117. 

City  and  farm  population,  87. 

Civilization  and  the  land  ques- 
tion, 77. 

Combinations,  124. 

Commerce,  24;  legislation  in 
favor  of,  445  ;  of  nations,  420. 

Commercial  crises,  369. 

Commons,    on    monopolies,    152. 

Communism,  modern,  24/. 

Comparative  table  of  expendi- 
tures, 278. 

Competing  groups,   169. 

Competition  and  demand,  299; 
free,  27;  in  groups,  29;  plane 
of,  446. 

Conciliation,   238. 

Consumer's  profits,  273. 

Consumption,  analysis  of,  275; 
final,  272;  immediate,  272; 
inseparable  from  production, 
270;  in  the  United  States, 
284;   lack  of  economy  of,  90; 


(541) 


542 


INDEX. 


national,  283 ;  productive, 
2734  reform  of,  285;  regu- 
lates production,  269;  waste 
in,  287. 

Cooley,  on  taxation,  464. 

Cooperation,  aim  of,  204;  con- 
scious, of  society,  20;  distrib- 
utive, 193 ;  distributive,  in 
England,  195;  distributive,  in 
France,  196;  in  United  States, 
202;  nature  of,  193;  princi- 
ples of,  216;  productive,  194; 
unconscious,   of  society,    18. 

Corporate  farming,  91. 

Corporation,  the,  123;  laws  con- 
trolling, 452;  taxation  of, 
473. 

Cost  of  production,  321;  of  pro- 
duction and  rent,  160. 

Court  of  visitation,   418. 

Covarruvias   on   interest,    178. 

Cradoek  on  taxation,  473. 

Craft  guilds  in  England,  219. 

Credit,  343;  advantages  of,  344; 
and  value,  344;  creates  capi- 
tal, 345;  instruments  of,  343; 
overstrained,   346. 

Currency,  inflation  of,  346,  374. 

Debts,  public,  484. 

Demand    and    competition,    299; 

law  of,  296;    schedule,  294. 
Distribution,    dynamic    law    of, 

137;    nature  of,  132. 

Economic  effect  of  machinery, 
89;  experiment,  263;  free- 
dom, 435;  goods,  202;  inves- 
tigation, 491;  organization, 
24;    process,  unity  of,  61. 

Economic  life,  and  political 
economy,  33;  simplicity  of 
early,  21;    nature  of,  17. 

Economics  and  ethics,  53;  and 
politics,  54;  and  sociology, 
55;  concrete,  49;  outlines  of, 
44;  practical,  50;  private, 
54;    public,  54;    pure  science 


of,  47;  trend  of  modern,  4C 
wide  range  of,  35. 

Economy  of  consumption,  90. 

Eight-hour  law,  111. 

Ely,  kinds  of  money,  331;  0 
taxation,  467. 

Engel's  law,   275. 

England,  efficiency  of  labor,  103 
defects  in,  103. 

Equal  returns,  law  of,   135. 

Ethics  and  economics,  5B. 

Exchange,  beginnings  of,  323 
domestic,  360;  foreign,  361 
importance  of,  358;  means  o 
359;    organization  of,  357. 

Expenditure,  281;  pereentac 
of,  for  families  of  different  ii 
comes,  278;    public,  500. 

Farm  and  city  population,  87. 

Farmers'  alliance,  196,  202. 

Farming,    corporate,    91. 

Field  work,  493. 

Finance,  development  of,  488. 

Firm,  the,  123. 

Fisheries,  96. 

Fishing,  21. 

Forests,  96. 

Fourier,  251. 

France,    efficiency    of    labor    ii 

103;    defectives  in,  103. 
Franchises,    disposal    of    publi 

434;    tax  on,  461. 
Free  goods,  302;    trade,  421. 
French    school,    65;     revolutioi 

the,  246. 
Futures,  trade  in,  401. 

Gambling,  why  detrimental,  39! 
Gas-works,  municipal  ownershi 

of,  432. 
George,  Henry,  interest,  179;    0 

natural  distribution,   133. 
German  school,  49. 
Germany,  efficiency  of  labor,  103 

defectives  in,  103. 
Giffen,  opinion  on  trade  deprei 

sions,  394, 


INDEX. 


543 


Government  by  injunction,  460 ; 
conservative,  245  ;  machinery, 
imperfections  of,  506  ;  manage- 
ment, 453  ;  ownership,  453. 

Grange,  the,  196,  202. 

Gross  product,  how  distributed, 
138. 


Hadley,  on  pooling,  433. 

Hebden      Bridge      manufacturing 

company,  198. 
Hermann,     interest    and     wages, 

180. 
Hildebrand,  49. 
Hobbs  on  taxation,  473. 
Human  wants,  variety  of,  270. 
Hunting,  21. 


ICARIA,  249. 

Immigration,  restriction  of,  112. 

Inadequacy  of  socialism,  257. 

Income  tax,  474,  477  ;  objections 
to,  515. 

Indirect  taxes,  483. 

Industrial  stage,  25 ;  revolution, 
26. 

Industries,  public  control  of, 
449  ;  by  commissions,  450. 

Industry,  regulation  of,  446  ;  re- 
striction of,  445. 

Inheritance  tax,  474. 

Italy,  defectives  in,  103. 

Insurance,  405. 

Interest,  as  a  factor  in  distribu- 
tions, 186  ;  economic,  175  ;  ef- 
fect of  cheap  money,  184  ;  laws 
regulating,  184 ;  loan,  175  ; 
nature  of,  175;  premium  on 
exchange,  181  ;  theories  of,  176. 

Interstate  commerce  commission, 
418. 

Investigation,  accounting  and 
compearing,  521 ;  condition  of 
packing-house  employes,  534 ; 
canals  in  their  relation  to  rail- 
roads, 632  ;  economic  purpose 
of,  517  ;  examples  of  methods, 
522;    examples    of,    622;    gath- 


ering material  in,  518 ;  histori- 
cal, 514 ;  interstate  commerce 
law,  529 ;  note-taking,  520  ; 
municipal  government  of  Ber- 
lin, 535 ;  productive  coopera- 
tion in  England,  533  ;  Prussian 
railroad  system,  537  ;  railroad 
rates,  524  ;  railroad  accidents, 
530 ;  of  the  labor  question, 
623 ;  scope  of  economic,  515 ; 
topics  for,  538. 
Irrigation,  92  ;  and  panics,  94  ; 
general  results  of,  95. 


Kettering    Boot    and  Shoe  Co. 

201. 
Knies,  49. 
Knights  of  Labor,  225. 


Land,  area,  82 ;  offices  of  land, 
76 ;  and  population,  78 ;  or 
nature,  75  ;  tenure,  98. 

Labor,  cooperation  of,  106 ;  di- 
vision of,  106  ;  grades  of,  104  ; 
improved  conditions  of,  108 ; 
laws  of,  110 ;  legislation,  445; 
organization  of,  109  ;  price 
plan,  cooperation  of,  105  ; 
productivity  of,  108 ;  protec- 
tion of,  110  ;  service  of,  101. 

Labor  force,  extent  of,  102 ;  qual- 
ity of,  103. 

Labor  organizations,  31 ;  effect- 
iveness of,  236  ;   origin  of,  218. 

Lassalle,  Ferd.,  264. 

Lecky  on  prosperity  of  a  nation, 
268. 

Leroy-Beaulieu,  on  taxation,  464. 

Library,  material,  classification 
of  the,  512. 

Limited  returns,  158. 

Local  government  and  reforms, 
262. 

Luxury,  280. 


Machinery,   economic  effects   of, 
89. 


544 


INDEX. 


Malthus,  49. 

Malthus,  theory  of  food-supply 
and  population,  92. 

Managing  class,  the,  188. 

Manufactures,    23. 

Margin    of    cultivation,    159. 

Marginal  utility,  295. 

Market,  the,  360;  demand, 
298;  interferences,  313;  price, 
318. 

Marx,  Karl,  254;  no  rational 
cause  for  interest,  180. 

McCallock  on  interest,   179. 

McKinley  bill,   383. 

Menger,  interest  and  wages,  180. 

Mercantilists,   443. 

Mill,  J.  S.,  49,  65;  on  taxation, 
448. 

Mill,  James,  on  interest,   179. 

Money,  323 ;  amount  needed.  337  ; 
early  history  of,  323 ;  deferred 
payments,  334;  functions  of, 
332;  kinds  of,  331;  measure 
of  value,  332;  multiple  stand- 
ard, 334;  principles  of  circu- 
lation, 336 ;  standard  of  value, 
333;    storage  of  value,  335. 

Monetary  history  of  the  U.  S., 
340. 

More's  Utopia,  243. 

Moreillet,  247. 

Monometalism,  338. 

Monopolies,  artificial,  151;  nat- 
ural,  151;   restriction  of,  446. 

Monopoly,  benefit  of,  for  the  peo- 
ple, 447;  in  land.  85;  prices, 
191;  privileges,  150;  profits, 
191,  126,  418. 

Moses,  as  an  organizer,  240. 

Mun,  on  taxation,  473. 

National  banks,  351 ;  organiza- 
tion, 351;    regulation,  352. 

Nature,  bounties  of,  76. 

Nelson,  N.  O.  Co.,  211. 

Net  product,  131;  divisions  of, 
133;     undivided,   135. 

Normal  price,  318. 


Norway,  defectives  in,  103. 

Organization,  private,  122;  and 
increased  productivity,  129. 

Organized  labor,  effect  on  pro- 
duction, 127. 

Owen,  Robert,  195,  254. 

Panics,  375;  approaching,  378; 
and  tariff,  383;  in  the  U.  S., 
384;  management  of,  392;  of 
1893,  390;  precipitation  of, 
380;     prevention   of,   392. 

Paper  money,  339;  and  bank 
notes,  340. 

Partnership,  the,  123. 

Petty  on  taxation,  474. 

Physiocrats,  65,  444. 

Political  economy,  objects  of,  57; 
method  of  study,  57 ;  a  science, 
38 ;  arises  from,  34 ;  definition 
of,  39 ;  and  economic  life,  33 ; 
field  of,  42;  liberal  conception 
of,  43;  narrow  conception  of, 
43;  problem  of,  51;  principles 
and  laws  of,  37;  subjective 
boundary  of,  43;    treats  of,  34. 

Political  organization,  effect  on 
values,  129. 

Politics  and  economics,  54,  55. 

Poll  tax,  474,  476. 

Population  and  food-supply,  93; 
and  land,  78;  farm  and  city, 
87. 

Plato's  Republic,  241. 

Price,  310;  market,  310;  nor- 
mal,   321. 

Prices,  and  rent,  159;  causes  of 
law,  381;  equalized,  408;  lim- 
itation of,  320;  movement  of, 
376. 

Proctor  &  Gamble  Co.,  206. 

Production,  character  of,  62;  es- 
sential factors  of,  71;  means 
of  increasing,  73;  processes  of, 
70. 

Producers,  who  are,  4,  65. 

Profit-sharing,  206. 


INDEX. 


646 


Profits,  and  the  law  of  rent,  147  ; 
and  rent,  189  ;  and  competi- 
tion, 188 ;  gross,  187 ;  pure, 
187  ;  pure,  and  market  prices, 
190. 

Protective  tariff,  484,  485. 

Progress,  nature  of,  265. 

Property,  rights  of,  148. 

Proudhon,  253;  "property  is 
robbery,"  180. 

Public  debts,  484. 

Public  expenditure,  600. 

Public  economics,  significance  of, 
462. 


Rate  on  loans,  182. 

Railroad,  commissions,  437  ;  gov- 
ernment ownership  of,  450 ; 
management,  433 ;  abuses  of, 
433 ;  problems,  432  ;  rates, 
436 ;    statistics,    434. 

Reform,  no  formula  for,  266. 

Rent,  153  ;  and  free  land,  162 ; 
and  prices,  159 ;  economic  sig- 
nificance of,  163 ;  causes  of, 
154 ;  contract,  153 ;  economic, 
153  ;  how  arises,  155. 

Residual  claimant,  146. 

Revenues,  methods  of  collecting, 
490. 

Ricardo,  49. 

Risk,  compensation  for,  396. 

Rochdale  pioneers,  196. 

Rodbertus,  254 ;  no  rational 
cause  for  interest,    180. 

Rogers,  Thorold,  on  trade  unions, 
228. 

Roman  practice  in  government, 
243. 

Roscher,  65  :  occupation  of  labor, 
101. 


Savings,     279;      desirability     of, 

281 ;   and  abstinence,  115. 
Savings  banks,  355. 
Say,  interest  and  wages,  180. 
Seligman,  on  taxation,  474. 
Senior,  49. 


Sherman,  John,  on  taxation,  469. 

Single  tax,  495. 

Socialism,  and  the  gospel,  263 ; 
claims  of,  239 ;  in  America, 
255 ;  modern,  250 ;  German, 
254. 

Social  order,  adjustments  of,  240. 

Social  organization,  effects  of, 
56. 

Soil,  difference  in  fertility  of, 
157. 

Speculation,  396 ;  illegitimate, 
397  ;  in  productive  industry, 
403 ;  legitimate,  397 ;  moral 
and  economic  effects,  404 ; 
remedies,    405. 

Spending,  279. 

State,  the,  and  industry,  31. 

State  socialism,  252,  461. 

Strikes,  result  of,  233. 

Supply,  laws  of,  316. 

Sweden,  defectives  in,  103. 

Sweating  system,  286. 


Tariff,  484,  485 ;  and  panics, 
383. 

Tax,  direct,  476;  income,  474, 
477 ;  inheritance,  482  ;  fran- 
chise, 481 ;  land  and  income, 
497  ;  personal  property,  481 ; 
poll,  476 ;  real  property,  480 ; 
single,  495. 

Taxation,  canons  of,  468 ;  devel- 
opment of,  488 ;  double,  491  ; 
economic  idea  in,  451  ;  inci- 
dence of,  473  ;  just  and  equi- 
table, 453  ;  modern  imperfec- 
tions of,  489  ;  of  corporations, 
494  ;  principles  of,  468-9 ;  re- 
lation to  private  economics, 
453  ;  definition  of,  464. 

Taxes,  indirect,  483 ;  classifica- 
tion of,  475 ;  inequitable  as- 
sessment of,  498 ;  methods  of 
collection  of,  500. 

Tellez,  Gonzalez,  on  interest,  178. 

Terminology,  mistakes  in,  62. 

Territory,  extension  of,  81. 


546 


INDEX. 


Trade,  23;  balance  of,  366; 
courses  of,  in  depressions,  372 ; 
cycle,  371;    depression,  370. 

Trade  unions,  development  of, 
222;  influence  on  wages,  235; 
objects   of,   227. 

Transportation,  and  agriculture, 
83;  advantages  of  water,  410; 
neglected,  411;  effect  of  on 
prices,  408 ;  eJEf ect  of  on  indus- 
try, 409;  economic  value  of 
cheap,   409. 

Trust,  the  modern,  465;  evil  ef- 
fects of,  468 ;  objection  to,  457, 
469. 

Trusts,  124;    taxation  of,  461. 

Turgot,  fructification  theory  of 
interest,   179. 

Unionism,  mistakes  of,  229. 
United  States,  land  policy  of,  84 ; 

agricultural  area  of,  86. 
Utilities,  creation  of,  36. 
Utility,    293. 

Vacuna,  Vaconius,  on  interest, 
178. 

Value,  300 ;  difference  of  opinion 
of,  301;  and  utility,  302;  in- 
trinsic, 305;  objective,  306; 
subjective,  306;  utility  the 
cause  of,  306;   theories  of,  304. 


Values,  international,  362. 
Venice,  Bank  of,  34/. 

Wages,  economic  significance  of, 
174;  scientific  law  of,  169; 
residual-claimant  theory,  167 ; 
iron  law  of,  167 ;  determina- 
tion of  rate  of,  166;  increase 
of,  173;  improved  by  legisla- 
tion, 173;  and  business  sense, 
171;  and  philanthropy,  172; 
and  eight-hour  day,  172;  and 
variability  of  gross  product, 
143;  laws  of,  harmonized,  146; 
labor  the  cause  of,  164;  pure, 
164;  gross,  164;  real,  164; 
nominal,  164. 

Walker  on  profits,  147;  defini- 
tion of  money,  331. 

Wage-fund  theory,  16. 

Wagner,  problem  of  political 
economy,  51. 

Want,  degrees  of,   271. 

Wants,  satisfaction  of  economic, 
271. 

Waste,  281. 

Water-works,  municipal  owner- 
ship of,  452. 

Wealth,  creation  of,  63;  getting 
and  using,  35;  getting,  tech- 
nology of,  35;  non-capital, 
115;  conditions  of  producing, 
71;    struggle  for,  293. 


3ooks  named  in  Professor  Blackmars  Lists 
of  Books  for  Reference  appended  to  the 
Foregoing  Chapters. 


3Y   LUIGI    COSSA 

Introduction  to  the  Study  of  Political  Economy 

Cloth     Crown  8vo     $  2.60  net 

BY   J.    N.    KEYNES 

Scope  and  Methods  of  Political  Economy 

Qoth    8vo    $  2.25  net 

BY   W.    S.   JEVONS 

The  Theory  of  Political  Economy 

Cloth    8vo     273  pages    $  2. 50  net 

BY  ALFRED  MARSHALL,  University  of  Cambridge 

Principles  of  Economics,  I 

Cloth     8vo     820  pages    $  4.00  net 

BY   JOHN    KELLS    INGRAM 

A  History  of  Political  Economy 

With  a  Preface  by  E.  J.  James 

Cloth     xvi  +  250  pages    ^1.50  net 


ON   THE  ECONOMICS  OF  PRODUCTION,  ETC. 

rHE    ELEMENTS    OF    THE    ECONOMICS     OF 
INDUSTRY 

By  Alfred  Marshall,  Professor  of  Political  Economy  in  the  University 
of  Cambridge. 

Cloth     i2mo    421  pages    5 1. 00  net 

LABOR   PROBLEMS 

By  T.  S.  Adams  and  H.  L.  Sumner,  University  of  Wisconsin. 
A  descriptive  and  analytical  statement  of  great  value. 

Cloth     XV +579  pages     5 1. 60  net 


STUDIES     IN    THE    EVOLUTION     OF    INDUS- 
TRIAL   SOCIETY 

By  Richard  T.  Ely,  University  of  Wisconsin. 

A  general  survey  of  the  subject  is  followed  by  the  treatment  of 
specific  problems  which  have  been  the  outcome  of  industrial  evolu- 
tion. It  opens  to  the  interested  student  the  many  points  at  which  the 
science  of  economics  applies  in  that  immense  field  of  practical  affairs 
in  which  ethics,  economics,  and  sociology  meet. 

Citizen's  Library    Cloth,  leather  back    ^1.25  net 

THE   LABOR   MOVEMENT   IN    AMERICA 

By  Richard  T.  Ely,  University  of  Wisconsin. 

Citizen^ s  Library    Qoth,  leather  back    xvi  +  399  pages    ^1.25 

LABOR   AND   THE   POPULAR   WELFARE 

By  W.  H.  Mallock. 

Cloth     Crown  8vo     357  pages    ^1.25 


ON   THE  ECONOMICS  OF  DISTRIBUTION,  ETC. 

THE    DISTRIBUTION    OF   WEALTH 

By  Thomas  Nixon  Carver,  Professor  of  Political  Economy  in  Harvard 

University. 

An  analytical  study  of  the  motives  which  govern  men  in  business 
and  industrial  life. 

Cloth    Crown  8vo    $1.50  net 

THE    DISTRIBUTION    OF   WEALTH 

By  John  R.  Commons.  Qoth    Crown  8vo    j^  1.25  net 

SOCIALISM 

By  John  Spargo,  Author  of  "The  Bitter  Cry  of  the  Children." 

Cloth     l2mo     257  pages     $1.25  net 

A   HISTORY   OF   SOCIALISM 

By  Thomas  Kirkup    Third  Edition  Revised  and  Enlarged. 

Cloth     i2mo     400  pages     j^  2.25  net 


ON  THE  ECONOMICS  OF  CONSUMPTION,  ETC 

vlONEY:    A  Study  of  the  Theory  of  the  Medium  of 
Exchange 

By  David  Kinley,  Ph.D.,  University  of  Illinois. 

Citizen's  Library    Cloth,  leather  back    %  1.25  net 

P'EDERAL      POWER     OVER     CARRIERS     AND 
CORPORATIONS 

By  E.  Parmalee  Prentice.  Cloth    8vo    244  pages    $  i  .50  net 

RESTRICTIVE    RAILWAY   LEGISLATION 

By  Henry  S.  Haines. 

Cloth     i2mo     355  pages    ^1.25  net 

GOVERNMENT  REGULATION  OF  RAILWAY 
RATES 

By  Hugo  R.  Meyer.  Cloth    ^1.50  net 

RAILWAY    LEGISLATION     IN     THE     UNITED 
STATES 

By  Balthasar  H.  Meyer,  University  of  Wisconsin. 

Citizen's  Library    Cloth,  leather  back    ^1.25  net 

MONOPOLIES   AND   TRUSTS 

By  Richard  T.  Ely,  University  of  Wisconsin 

Citizen's  Library    Cloth,  half  leather    j^S  1.25  net 

rHE  TARIFF  AND  THE  TRUSTS 

By  Franklin  Pierce,  of  the  New  York  Bar.     A  clear,  effective  treat- 
ment of  present  conditions. 

Cloth     i2mo     387  pages    $  1.50  net 

ESSAYS    IN    TAXATION 

By  Edwin  R.  A.  Seligman,  Columbia  University. 

Qoth     8vo    432  pages    $  3,00  net 

\N   INTRODUCTION   TO   PUBLIC   FINANCE 

By  Carl  C.  Plehn. 

Cloth     i2mo     384  pages     $  1.60  net 
PUBLIC    FINANCE 
By  C.  F.  Bastable. 

Cloth     8vo     780  pages    $  4.00  net 


ELEMENTARY  IVORKS  ON  GENERAL  ECONOMICS 

THE     PRINCIPLES    OF    WEALTH    AND   WEL- 
FARE 

By  CHARLES   LEE   RAPER,  Ph.D. 

"  Professor  Raper  belongs  to  that  newer  school  of  economists 
who  see  that  the  search  for  wealth  is  one  aspect  of  human  welfare 
and  that  the  creation  of  utilities  through  the  satisfaction  of  wants  is 
the  point  of  approach  for  the  entire  matter.  We  particularly  recom- 
mend this  book  because  of  this  fact."  —  World  To-day. 

"  It  is  the  clearest  and  withal  the  most  practical  statement  of 
the  principles  of  wealth  and  welfare  that  has  come  under  our  notice." 

—  Baltimore  Sun. 
Suitable  for  use  in  high  schools,  etc. 

Cloth     i2mo     336  pages     ^  i.io  net 

OUTLINES   OF   ELEMENTARY   ECONOMICS 

By  HERBERT  J.   DAVENPORT. 

A  closely  knit  statement  of  elementary  theory  of  the  science  of 
economics,  studiously  theoretical  rather  than  descriptive.  Consider- 
able space  is  given  to  important  "  Suggestive  Questions "  which 
stimulate  the  student's  interest  by  drawing  on  his  fund  of  observation 
and  experience,  and  on  his  power  to  generalize  roughly. 

Cloth     xiv  +  280  pages     80  cents  net 

ELEMENTARY    PRINCIPLES    OF    ECONOMICS 

By  Richard  T.  Ely,  University  of  Wisconsin,  and  George  Ray  Wicker, 

Dartmouth  College. 

This  work  combines  material  for  teaching  both  economic  history 
and  economic  theory,  each  being  made  to  supplement  the  other.  It 
is  clear,  concise,  concrete,  and  copiously  illustrated. 

Cloth,  half  leather     i2mo    vii  +  388  pages    ^  i.cx)  net 

OUTLINES   OF   ECONOMICS 

By  Richard  T.  Ely,  Professor  of  Political  Economy  and  Director  of  the 
School  of  Economics,  Political  Science,  and  History  in  the  University 
of  Wisconsin. 
Citizen's  Library    Cloth,  leather  back     xii  +  432  pages     ^1.25  net 


ALL  OF  THE  BOOKS  LISTED  ABOVE  ARE  PUBLISHED  BY 

THE    MACMILLAN    COMPANY 

64-66   FIFTH  AVENUE,  NEW  YORK 


amimm^ 


aummh 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


,    AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RE:rURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


■f^y  io  ijjj 


W^^ 


\sm 


^-^93th 


OCT  V'^i  'g 


310 


■'g-ftd.-, 


♦'*^ 


^ 


l^'-^-^ 


LD  21-100m-7/33 


I  u.   u'j  /  o '^ 


287971 

UNIVERSITY  OF  CALIFORNIA  LIBRARY 


